Automotive OEMs tell suppliers to be prepared to play, or go home

The automotive industry in North America has rebounded significantly with new models hitting showroom floors and sales ticking upward. However, the general concern for the OEMs is whether or not their suppliers can keep up. According to an editorial in IHS SupplierBusiness, new car sales are on pace to exceed 15 million in the U.S. this year, and North American production is expected to exceed 16 million in 2013 and 17 million in 2015, as reported by IHS Automotive.
Michael Robinet, managing director for IHS Automotive Consulting, forecasts about 135 vehicle launches per year through 2016, compared to 85 a year in 2010 and 2011. “There’s a lot of pressure on a supply base that’s already strained,” Robinet said in the editorial. “If suppliers can’t handle the pace, launches could start slipping.”
The reluctance of many suppliers to expand capacity for fear of another “fiscal cliff” in the automotive business (they’ve been down that road before) has OEMs worried. OEMs want assurance that their suppliers can keep pace with the increasing number of launches. Larger Tier 1 suppliers are responding to the call, however smaller (Tier 2 and 3) suppliers are in a conundrum over how to maintain a presence in the automotive industry without getting killed.
Another editorial from IHS SupplierBusiness, noted that smaller suppliers are “finding business increasingly difficult as a small group of huge global suppliers look to take bigger contracts from OEM – and conditions are only going to get tougher.”
Large global Tier 1 suppliers have the financial wherewithal to respond to the OEMs demands for expanding capacity as well as capabilities. One capability that OEMs want in their suppliers is more R&D, said IHS SupplierBusiness. “When it comes to R&D, big suppliers can dwarf the investment from the smaller competitors, providing them with a major advantage,” the editorial stated. “As automakers implement [global platforms for light-vehicle production], they are relying on suppliers to make the necessary investment in the research and development of new technologies and also their international facilities.”
For example, International Automotive Components (IAC) Group, a large global Tier 1 supplier with more than 90 manufacturing locations, has developed much in the way of new plastics processing technologies for producing better, more aesthetic vehicle interiors. The company provides a total range of instrument panel solutions including air distribution ducts, air outlets, glove boxes, decorative appliqués and other trim. The company has developed “unique surface materials” that meet consumer demand for comfort and craftsmanship such as its SprayPUR, TAC 2, and FastCast, that IAC ( says “offer superior surface workmanship in touch, color, grain and gloss.”
Smaller suppliers who can’t provide this high level of R&D and meet capacity demands are also becoming targets as OEMs look to reduce their pool of suppliers and negotiate hard on fewer, but larger contracts. IHS SupplierBusiness pointed to Ford’s purchasing strategy as an example. “Last year [Ford] allocated 65% of its global purchasing to companies on its Aligned Business Framework list of 104 preferred suppliers, up from 55% in 2010. The share will continue to increase as Ford looks to reduce its total number of suppliers from 1250 to 750.”
OEMs are also asking suppliers for “shared responsibility” and are asking for contribution from their suppliers for potential product liability, warranty and recall claims,” said IHS SupplierBusiness, adding that “the emphasis on shared responsibility has worked its way from the automakers down to all three tiers of the supply chain.”
That means that even mold manufacturers could get caught up in any problems experienced by the automakers. While in the past, very few mold manufacturers were dragged into liability lawsuits, there’s a very real possibility in today’s consumer advocacy climate that it could happen. This also has Tier 1 suppliers asking “whether its tier two and three suppliers are financially viable to pay should warranty exposures or claims occur,” said SupplierBusiness. For many of the Tier 2 and 3 suppliers, the answer to that question is most likely a resounding "No!"
IHS Automotive Consulting’s Robinet also notes that with most suppliers “running three crews or shifts” to meet current demand, “there is not a lot of slack in the system.” However, asking suppliers to expand rapidly to keep up with demand has its pitfalls, and many are connected with liability issues discussed above. “Suppliers are all too aware that being asked to expand too quickly could mean that quality of parts is compromised in the rush to meet demand, creating more of these [product liability] claims,” said SupplierBusiness.
Being an automotive supplier has always had its rewards and punishments, but reaching for the rewards, particularly for the smaller Tier 2 and 3 suppliers such as molders and mold manufacturers, has increasing risk. We’ve seen what has happened in the past when small companies play in the same sand box with the big dogs. And it ain't pretty.
As the OEMs and Tier one suppliers look to reduce risk throughout the supply chain, the Tier 2 and 3 suppliers need to look at reducing risk in their automotive customer base.

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