Suppliers and their Big 3 customers sometimes seem like a grumpy married couple. As partial compensation for their hard-nosed purchasing tactics, the Big 3 are offering more business to suppliers that produce complex component modules.
But everything comes at a price. Suppliers must engineer their own products, and they are expected to cover warranty costs.
Tired of the continual friction, suppliers are seeking more business with transplant manufacturers. But it's a slow, laborious courtship - foreign automakers are loyal to their longtime suppliers.
During a discussion last month with Automotive News, four veteran supplier executives discussed these and other issues. They were interviewed by Editorial Director Peter Brown, Editor David Sedgwick and Staff Reporter Julie Armstrong.
Portions of the question-and-answer session appeared in our Aug. 2 issue. Here are additional excerpts. The executives:
The Big 3 generate less than 60 percent of U.S. vehicle sales. You are primarily Big 3 suppliers. 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 (foreign automakers) 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 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.
In terms of sharing technology, is Intier willing to sign Ford Motor Co.'s standard contract that has generated such a ruckus? Are you afraid Ford might reveal your trade secrets to competitors?
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? 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 spreads 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.
Do you have a program to buy components from minority suppliers?
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. 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 your 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 minority purchasing programs overall?
Taylor: The minority purchasing programs started off slow, then they mushroomed. They reached a peak, and now they are 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.
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 forcing you to cover more warranty costs? And how are you handling that?
Walker: I think warranty costs have been a big focus over the past number of years with our customers.
Part of the reason for going to modules is that you have somebody who is responsible for functionality as well as fit and craftsmanship. So you get a better vehicle. The best programs are win-lose. If you help (the customer), they share (the savings) with you. And if quality gets 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 problems. Our warranty costs are low. So it hasn't been an issue for us.
Do you have warranty insurance? Or are you self-insured?
Walker: Insurance would be extremely expensive. A lot of it comes down to design and upfront control of engineering and manufacturing.
Are automakers continuing to outsource more component 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'll 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 automakers continuing to buy more complex modules?
LeVeque: Yeah. 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 upfront, you'll end up with a better product.
Is that 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.
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.
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.
Six or seven years ago, there was an article that predicted GM, Ford and the Chrysler group won't make vehicles by 2010 and that Tier 1 suppliers will make vehicles for them. Do you expect that?
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 cotract, 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.