Planning Perspectives study shows suppliers hold keys to auto OEMs’ future

It’s been a good year for automakers overall. Reports show they are making record profits, which isn’t a bad thing, in spite of what capitalist deniers would have us think. But along with those profits are “unprecedented financial challenges presented by new technologies, societal changes, government regulations and increased competition, all of which require historic levels of capital investment to remain competitive,” according to a new study from Planning Perspectives Inc. (PPI; Birmingham, MI) on OEM-supplier working relations. In spite of the current boom, many industry analysts expect auto sales to drop in 2018 and 2019, which will reduce revenue.

The latest news reports show that the drop off in auto sales has already started, with dealers offering big incentives to move inventory off their lots. That is the roller-coaster ride of the automotive industry, and, unfortunately, it drags suppliers up and down with it.

PPI notes that analysts agree that “if automakers are going to meet these financial challenges, they will have to work more closely with their suppliers to be successful, because OEMs spend 70 to 80% of their revenue on parts, components and materials provided by their suppliers.”

John Henke, President of Planning Perspectives Inc., said, “Going forward, automakers will have to invest heavily in new resources and training programs to improve their working relations with suppliers because suppliers have a significant impact on an automaker’s profits. Currently this investment isn’t happening across OEMs with sufficient focus.”

Sounds good, but how long have we been talking about OEM-supplier relationships, trust issues and so forth? Will it ever become a reality? The 16^th annual North American Automotive OEM – Supplier Working Relations Index Study evaluates and ranks Ford, General Motors, Fiat Chrysler America (FCA), Nissan, Toyota and Honda on their working relations with their suppliers.

We know where GM usually ends up in these surveys—typically at the bottom, where that company has been for a long time since the days of Lopez in the 1990s. However, according to PPI, GM “showed significant improvement in this year’s study, gaining 27 points and moving up to fourth place in the rankings by displacing Nissan, which dropped 19 points to fifth place. Nissan and FCA now significantly lag behind the other OEMs. Ford improved by six points, but continues to trail the two traditional leaders, Toyota and Honda. Both of these Japanese automakers had shown significant improvement over the past two years, but this year they dropped four and seven points, respectively, noted the study.

“At a time of record profits when the automakers should be investing in building more collaborative relations with their suppliers, the major indicators of this year’s study suggest this isn’t happening,” commented Henke.

But let’s not get too excited about GM’s higher rating. While it “improved significantly,” the carmaker merely moved back to the “low adequate status where it was three years ago,” Henke said. He called that a “bright spot” in the study, which speaks volumes about the state of automotive OEM-supplier relationships.

Over the years, the study has shown that automakers must have certain characteristics in their purchasing organizations in order to build more collaborative relations, which lead to greater profits. The problem, as Henke sees it, is that these key characteristics have been flat or declining for several years for nearly all of the automakers, including GM, in spite of its improvement this year.

While I often beat up on GM in these blogs, Henke notes that Nissan and FCA, which are ranked fifth and sixth place respectively in the rankings, are on trajectories that don’t bode well for either of those OEMs. “For both, the percentage of buying situations the suppliers rank as being very poor to poor is increasing, while the percentage ranked good to very good is falling, and it has been for several years,” he said.

This lack of progress in improving supplier relations is particularly glaring at the purchasing area level. Even Toyota, which is noted for having relatively good supplier relations, dropped in three purchasing areas and improved in three. Honda dropped in five out of the six purchasing areas.

Henke said that one of the most important measures of OEM-supplier relations is trust. Again, that topic was featured in one of my recent blogs and it appears to be a biggie! “As in any relationship, [trust] is the foundation upon which everything else is built,” Henke said. “Both the purchasing VP and buyers must be committed to this effort. However, when it comes to actively building more trusting supplier relations, five of the OEMs show disappointing results.”

The study found that only GM’s purchasing VP and buyers appear to be working together to build trusting supplier relations. At FCA, and particularly at Ford, the purchasing VPs are perceived by suppliers to be working to build more trusting relations but their buyers are not. “The purchasing area volatility, coupled with less-than-rigorous efforts to build more trusting supplier relations, suggests the automakers’ purchasing executives may have taken their eyes off the ball,” said Henke. “More needs to be done at every level by every purchasing VP. For example, we know that investing in the training or retraining of buyers, who are key in building collaborative working relations, works; that’s how Toyota and Honda turned around their relations ranking in 2013.”

Nissan has its work cut out for it in this regard, the study revealed. Nissan VP and buyers dropped significantly in the rankings, suggesting that Nissan “took a very aggressive adversarial approach to getting price concessions from suppliers,” said Henke. “However, things didn’t work out as planned. Nissan’s aggressive behavior caused supplier buying situations experiencing very poor to poor relations to increase dramatically in 2014 and 2015. As relations worsened suppliers reduced their price concessions, which resulted in lower price concession contribution per vehicle in 2014.”

All of this proves that if suppliers are going to share the playground with these giant OEMs, they’d better be ready to play hardball. It’s never been easy to be a supplier to the automakers, and it appears that it’s not getting any better.