The industry's crystal-ball gazers expect U.S. light-vehicle sales to approach 16.8 million units this year. By any measure, that's a good year.
But suppliers are a nervous bunch. Automakers are demanding price cuts, steel prices remain stubbornly high, and the economy appears unpredictable.
During a July 13 discussion with Automotive News, four veteran supplier executives discussed a wide range of issues facing suppliers. They were interviewed by Associate Publisher Peter Brown, Editor David Sedgwick and Staff Reporter Julie Armstrong. Participants included:
What are you hearing about the automakers' sales volumes for the remainder of the year?
Meridian's Fran LeVeque: "You say, 'I'm in financial distress, and I need relief.' And your customers say, 'We're not going to source you.'" PHOTO: JOE WILSSENS
Pessimism all around?
Manganello: At the beginning of the year, we forecasted a 16.3 million-unit year. We're probably a little bit more pessimistic. And that's already been accounted for in our business plan. In the first six months, production schedules materialized pretty much the way we projected. In the second half, it's anybody's guess what's going to happen. We were somewhat conservative. We didn't take the same rosy picture that everybody else did at the beginning of the year.
Are your customers sticking with their production plan, or are they cutting production schedules?
Intier's Don Walker: "The other commodities have not had the same price increases as steel. Steel is number one. The real issue is: How long will steel commodities stay as high as they are?" PHOTO: JOE WILSSENS
Taylor: I sit on the supply council for Chrysler, and once a quarter, they bring all of us in and they bring in their economist. They do a real deep dive into all aspects of the auto industry . And they are projecting 17 million units .Their outlook is quite optimistic.
Manganello: For us, volume isn't as important as what products we're selling and what models they're on. Take diesel engines in Europe. Sales of vehicles with diesel engines are just going through the roof, and we can't make enough turbochargers. So it doesn't matter what the (overall) sales volumes are in Europe. They're selling so many diesel engines over there. That's a bigger factor for us than overall vehicle sales volumes.
Taylor: I think you can really get off kilter if you put too much focus on just the sales volume without looking at the margins, and what's the distribution of that 17 million in terms of how much now is coming from abroad.
One of the big issues recently has been the high price of raw materials. Steel continues to be a tremendous problem. Are those prices going to remain high? Who pays?
Taylor: Prices are going to remain high for the foreseeable future. We just don't see a light at the end of the tunnel. Most of us feel that the steel industry is gouging the auto industry. It may be a payback for what happened to them five, six years ago when (automakers) put the squeeze on them.
Right now the effect is huge for small guys like myself. You're already struggling, trying to make sure there's some profit margin left over.
When all of us did our projections for 2004, nobody saw this coming. It hit us like a ton of bricks when all of this started in January. And it just blew everybody's forecasts. You had given your banks your forecast - well, they threw them all out of the window. I've been in the auto business over 36 years, but I just have never seen it this bad.
Manganello: I think we're all paying a little bit. We've tried to resist it, offset it, fight it, delay it, everything possible. But at the end of the day, we had to cave in a little bit on paying suppliers what they needed. Some of our suppliers are small. We certainly don't want to drive them out of business. Yet you talk to your customers anywhere in the world, and it's very difficult to talk about steel price increases.
SET's Sid Taylor: "When all of us did our projections for 2004, nobody saw this coming. It hit us like a ton of bricks." PHOTO: JOE WILSSENS
Manganello: We've got very mature, good relationships with our suppliers, and we're trying to maintain those relationships in the face of very difficult discussions.
Are you getting any relief from your customers?
Manganello: Nothing that I can talk about, really. To be honest, it's not as big an issue for us in Europe as it is over here in North America. In North America, you just hit brick walls. So we're just working like heck to offset the increases and try to get savings somewhere else to make up for anything that we get stuck with on steel.
Have you gotten some relief from non-Big 3 customers?
Manganello: We've gotten some relief outside of the Big 3 in some areas.
In North America?
And in Europe you said it wasn't so much an issue because the automakers allow price increases?
Manganello: No, I didn't say that. It's more stable over there. In Europe, they just haven't seen the steel price increases that we've seen over here.
BorgWarner's Tim Manganello: "We've tried to resist it, offset it, fight it, delay it, everything possible. But at the end of the day, we had to cave in a little bit." PHOTO: JOE WILSSENS
LeVeque: I haven't seen it on plastic. We also have a commodity - nickel - that is used on chrome bumpers. The price of nickel has doubled. I have not seen any relief. It's a double-edged sword, though. You say, "I'm in financial distress, and I need relief." And your customers say, "We're not going to source you - you're in financial distress." So you've got to be very careful how you handle it.
Walker: The other commodities have not had the same price increases as steel. Steel is number one. The real issue is how long will steel commodities stay as high as they are? Supply and demand dictate everything. The initial expectation was that you're going to see some surcharges by the end of the year.
I think part of this is being driven by China and the demand for steel over there. If there continues to be the same demand for steel over the long haul, then more steel production capacity will come on. But I don't know how long that will take.
The ultimate decision any supplier has to make is: How hard do you push for your price increase? It is having a big effect on everybody. If you say, "I can't continue to make this product, because I need to have relief from the increased price of steel or I'm not going to ship," then that's a pretty tough stand to take.
Have you told anybody that yet?
Walker: No. When you do that, you can be sure you're probably not going to get any more sourcing in the future.
Taylor: You can't afford not to ask for a price increase. You have to do it for survival. The banks are saying, "If you don't do something, we're going to pull out." You're sitting there, and you're dying a slow death. We've had to say, "Hey, look, we've eaten this for the last four, five months, but we can't continue to do it."
So then the customer says, "OK, we're not going to source you anymore. So it's a double-edged sword. And we feel sandwiched because we certainly don't want to alienate our customers. But if you don't do it, you're going to alienate the bank. So what do you do?
Some high-ranking people at the Big 3 aren't worried about encouraging new technology or being the supplier's favorite customer. Everything is a commodity to them. Is that changing?
Manganello: If you offer them an improvement in fuel economy or an improvement in emissions, they're going to talk to you. Customer demand is pushing everybody towards better fuel economy and better emissions. And automakers are going to talk to you because they have to meet those regulations first and foremost.
Taylor: We can try to sugarcoat this thing. But at the end of the day, it's all about price. Fifteen to 20 years ago, (U.S. suppliers) were not competitive. But the gap has closed for the most part. (Factors like quality) are considered to be fundamental, and if you don't have those, you wouldn't be a player anyway. So it all comes down to the big "P" word.
Are you concerned that automakers are shopping your own technology to others?
LeVeque: Not first hand. It's not a major issue at our company.
Is it an issue with any of you?
Walker: Here's what it comes down to: Is the product a commodity or not? Profit margins aren't that healthy with most of the major suppliers.
Are Ford and GM encouraging suppliers to build factories in China?
Manganello: I think it makes good business sense to go to China. The Chinese market is going to be one of the main markets in the world. We have two businesses in China now - one small and one medium. In the next two years, we'll have three more businesses going into China.
(When) we go in there, we'll try to find Chinese suppliers. We've done the same thing in India and Korea. We find local suppliers that can also help us in other parts of the world.
How much does it cost to make things in China? Obviously labor is cheaper.
Manganello: We find that Korea and India are every bit as competitive as China. They also have a more mature infrastructure and maybe a better (business) environment. If you do it right, you can be competitive in a lot of places in the world, not just China. China is a good place to go, but it takes a lot of work.
We've been in China since 1993. We tried to set up a joint venture, and it didn't work. We bailed out of that, and it took us a while to clean up the aftereffects. In China, either you go it alone, or you pick a really good partner.
Taylor: Ten years from now, there's going to be a lot of companies that look back and say, "Why did we do this?" You're going to see a lot of these joint ventures fall apart. That's my cynical view.
LeVeque: For our industry in North America to survive, we need to make sure that the assembly plants stay here. If they move, the whole industry moves. But if you assume the assembly plants stay here, a lot of design work still stay here and in Europe. When you move to a place like China, your overhead costs go up, and you have to bake that into the cost of your (product). But it depends on the labor content (of your product.)
People assume that China is the big growth market. But is it really a growth market for you? What is your most promising market in terms of region or product?
Walker: I don't think there's an easy answer. It really depends on the commodity. If you've got superior technology ... and if you are price-competitive, you can have huge growth in Europe and North America. However you cut it, automakers are still going to build 30 million vehicles per year in North America and Europe. For a company like ourselves, to say we're going to attack the Japanese market or the Korean market doesn't make a lot of sense. Because there is still a lot of opportunity here.
Taylor: Over the next 10 years, China will be a big market. But if you risk everything, then it's too big a risk.
How about you Fran? What's your big growth opportunity?
LeVeque: We are seeing more and more vertical integration in the products that we manufacture. So, our growth seems to be in related components.
All the stuff that goes into the front end?
LeVeque: Yeah. If we can effectively design a front end while reducing the number of parts, then we can grab some of the adjacent components. So we're seeing added content. And that seems to be our growth. Regionally, I agree with the comments on China. We make a lot of big stuff, and big stuff is hard to ship. And our labor content is less than 4 percent (of a component's cost), so it doesn't really dictate that we go over there. On the other hand, tooling (from China) is something that we're looking at.
The Big 3 now generate less than 60 percent of U.S. vehicle sales. You're largely a Big 3 supplier. Are you trying to diversify your customer base?
LeVeque: We recognize where the growth is, and we are trying to meet those emerging customers. On the other hand, we've still got to go with the 60 percent. Trucks and sport-utilities will continue to be the high-volume stuff.
Is it difficult to get business with the transplants?
LeVeque: Yes. I think they are very loyal to the people that brought them to the dance. Incumbency is a very strong sourcing consideration. But we've had some success. It's not easy, and it's not an automatic. It takes a lot of time and a lot of investment. We've done very well with Toyota, Honda and Nissan. Hopefully we will continue to (do business with) Ford, GM, DaimlerChrysler, BMW, Audi - our traditional customers.
Do you want to show your new product to 10 customers? There's a lot of cost associated with that. Or do you want to pick the best two or three customers and show your new technology to them? Ultimately they're the ones that are going to treat you the fairest and get it to market quickest.
And they won't share your technology with your competitors. So, a lot of the questions come around to your view of who the best customers are. And that's who you tend to put your resources towards.
In terms of sharing technology, is Intier willing to sign Ford's standard contract that has generated such a ruckus?
Walker: I'm not going to get into our internal policies with our customers. But I don't think any of our major customers would purposely share our technology. Does it happen (occasionally)? Yes, it does, and I have seen a couple of examples of that personally, which I won't get into.
However, I think that happens at the lower levels of an organization. I think the senior executives don't condone it ... Whether it's Ford or anyone else, if they start burning people on technology, word gets out, and it would get around like wildfire. And then they'll have a big fight on their hands. So I don't think that anybody intends to shop (a supplier's) technology. However, the automakers are looking for leverage on pricing. That's where you've got to be careful about what you show them.
It's tough for small guys to invest in China. Do you have a problem if you have to go to China?
Taylor: That is one of our biggest fears, is that this thing is gonna mushroom because of the pressures on the Big 3 to be more cost competitive; that there is going to be so much pressure.
Would your products be threatened by suppliers in China?
Taylor: There's no doubt about it.
Do you have full-fledged programs for minority purchasing?
Walker: We track minority purchasing. We've actually performed quite well. We have a program to encourage growth in minority purchasing. We take it seriously. But at the end of the day, nobody can afford to do something that's not cost-competitive. So we need to continue to work with minority suppliers to make sure they are capable and competitive. It's an important issue for our customers.
But nobody's going to pay more money (just to get) more minority content. At the end of the day, you have to make money. And if you don't make money, you can do all these nice things, and you won't have a job anymore because the banks and the shareholders will desert you. ... I think the health of the Big 3 will determine how much support there is for minority initiatives.
Do the Big 3 give you goals for minority purchasing?
Walker: Yeah, they give us specific targets. They set a minimum that they want you to exceed. If you do a good job, they'll recognize you.
Manganello: We have programs, too. We track our minority purchases. We are definitely looking for more. I think we could probably do better at minority purchasing. We don't sacrifice quality, cost or delivery just for minority purchases. All our suppliers have to meet the same yardstick. But, we definitely are interested in minority purchases. Would I like to do more? Yes.
Sid, how effective are the minority purchasing programs overall?
Taylor: The minority purchasing program started off slow, then it mushroomed. It reached a peak, and now it's on the downswing.
When was the peak?
Taylor: I'd say it was in the mid- to late 1990s. And I think it's now on the downswing.
Is that because of the mini-recession or downturn? Did the downswing coincide with the recession?
Taylor: You have a lot of companies who really aren't committed to minority programs. They don't believe in it - they do it just because they are told. You've got the people who make the purchase orders, and they are doing their own thing.
Are automakers continuing to outsource more engineering to suppliers? And do they want suppliers to produce more modules?
Walker: I believe it's a trend. However, things go in cycles. I believe the car companies need to maintain a core competency from an engineering standpoint . But it depends partly on their manufacturing strategies, so it may change platform to platform and by manufacturing plant.
In the long run, we're going to continue to see the car companies take advantage of the expertise the suppliers have. But, if you're going to be a module supplier you'll be asked for price reductions on a large number of parts that you don't make. So you need to be strong in program management. It's a whole different skill set.
What about Meridian? Are you producing more modules?
LeVeque: Yeah. We've been able to do some vertical integration. Next to our stamping and chrome plating operations, we have big injection machines. We manufacture the plastic components that go onto the steel bumper systems right there in the plant.
On one front end, we manufacture the lights and the fog lamps that go into those systems. So we have continued to grow. Our $50 bumper system is now a $100 bumper system.
Are automakers continuing to buy more complex, higher value modules?
LeVeque: We see it in things like door modules where you produce all of the guts of the door together. You can attach it to the door panel as well. If you have design responsibility up front, you'll end up with a better product.
Six or seven years ago, there was an article that predicted GM, Ford, and Chrysler will not be making vehicles by 2010 - that Tier 1 suppliers will make vehicles for them. Do you see any of that happening?
Walker: I think there is going to be a market for contract vehicles. But it's going to be either for excess capacity or for low-volume vehicles. It's very capital-intensive. If a car company has a 200,000 vehicle-per-year contract, I think the automaker will keep on making it. Unless you decide to make vehicles in China, in which case I presume they'll still make them themselves.
But one of the fundamental issues that car companies have to deal with, both in Europe and North America is legacy costs. No car company can be globally competitive if they have uncompetitive wages, benefits or work rules. The CAW and the UAW understand that, and the unions in Europe understand that as well.
But the unions' leaders are in a difficult position. They want to support the people they represent. However, they also understand that if they ask for too much, they're going to drive their companies out of business. They have to start working smarter. And I see there is a movement that way. All parties need to understand what they have to do to keep the industry healthy and competitive.
Are automakers forcing you to cover more warranty costs? And how are you handling that?
Walker: I think warranty has been a big focus over the past number of years with our customers. Part of the reason for going to modules is you have somebody who is responsible for the functionality as well as the fit and the craftsmanship. So you get a better vehicle. The best programs are win-lose. If you help the customers, they share (the savings) with you. And if (warranty costs) get worse, then we are responsible for it, and they are going to ask us to pick up part of the tab.
I think it's a reasonable thing to do. We haven't had any problems. Our warranty costs are low. So it hasn't been an issue for us.
Do you have warranty insurance, or are you essentially self-insured?
Walker: Insurance would be extremely expensive . A lot of it comes down to design and up-front control of engineering and manufacturing.