Why size matters for automotive suppliers
October 10, 2006
All automotive suppliers, regardless of size, find themselves facing a business environment more challenging than any they have previously experienced. Size with the economies of scale it brings is just one of numerous strategies that can be used to cope with the demanding nature of today's automotive industry.
Automotive suppliers are getting bigger.
The combined sales of the top 10 North American suppliers in 1995 were $58.2 billion. Ten years later that figure is nearly $81 billion, an increase of 40 percent. In 1995 only two suppliers had sales exceeding $5 billion annually. In 2005 six suppliers had sales exceeding $5 billion annually, with several others narrowly missing the threshold.
The consolidations that led to large automotive suppliers were fueled by a wave of mergers and acquisitions that peaked in 1998. Many reasons were given for the plethora of alliances in the mid- to late 1990s. A better range of products, access to new customers, and new geographic markets often were the most cited reasons.
In addition to these reasons, the industry also was fueled by a need to create shareholder value similar to what the dot-coms were delivering. Now the larger suppliers that resulted from the merger mania are finding real advantages resulting from their size.
The most recent noteworthy trend automotive suppliers have been undergoing is massive price pressure exerted by all OEMs, including those from Asia and Europe. Suppliers have been forced to find cost savings anywhere they can to survive in an environment of narrow to nonexistent profit margins. Larger companies, with economies of scale that allow them to exert price pressure on lower tiers, are better positioned than smaller suppliers to find these savings.
OEMs also are demanding that suppliers provide them with entire systems or modules, not just individual parts. The move to modular sourcing, which gained momentum in the mid- and late 1990s, has relegated many smaller firms to lower tiers in the supply chain. Larger suppliers are able to respond to this need.
Along with the demands for modular sourcing, OEMs require suppliers to take on a larger share of R&D and engineering. Many small suppliers don't have the staff and resources to respond to this demand. Because OEMs usually don't pay their suppliers until after a new vehicle hits the market, the payoff for R&D and engineering may be years away from the start of the project. Larger suppliers are better able to float this cost until it turns into a revenue source.
Since 1999 U.S. vehicle sales have remained at about 17 million units annually. Despite the economic downturn that began in 2001, automotive sales have not fallen from this plateau. Sales volumes have translated into larger orders from suppliers that build components for these vehicles. There are signs that automotive sales are falling off. Rising fuel prices, along with increases in interest rates, have finally taken a toll on vehicle sales. Sales for 2006 are forecast by many industry analysts to be the lowest since 1998. A decrease in sales often results in a dip in vehicle production, and larger suppliers will be able to ride out the storm more easily.
Larger suppliers also may benefit from the OEMs' migration to global platforms. While nearly every OEM traditionally has had operations around the world, these operations are now being run more than ever before as one company. In effect, the industry is undergoing a transformation from international operations to global operations.
The restructuring under way at General Motors is an excellent example. GM traditionally has maintained a large presence in the European and Australian markets. Its Opel and Vauxhall brands are quite successful in Europe, and the Holden brand has done well in Australia. For the first time GM is leveraging the expertise of each brand around the globe.
Developed in Europe where GM has considerable expertise in small, front-wheel-drive cars, the Opel brand will be transformed into Saturns sold in the U.S. GM's Australian Holden brand is respected for its expertise in rear-wheel-drive sedans. A Holden platform is expected to serve as the foundation for new rear-wheel-drive vehicles for the U.S. market that compete with DaimlerChrysler's Magnum®, Charger®, and 300C® sedans. Similar examples abound at Ford and Asian OEMs.
The shift to global management and platforms creates a need for component sourcing from suppliers that can supply such a program. To be in the running, U.S. suppliers need more than the ability to set up operations in other countries; they need the R&D and engineering capability to develop variants of their products for various markets. They also need the clout to duke it out with existing suppliers in those markets competing for the same business.
While the U.S. vehicle market has remained between 16 million and 17 million units for nearly a decade, the number of vehicles offered has risen dramatically. The larger number of offerings, in a mature market, has resulted in lower sales per model than in the past. This trend makes it necessary for suppliers to produce components for more models, or for platforms on which a large number of models are based, to maintain sales volumes.
These developments have not closed the automotive market to smaller suppliers. Rather, they have created an environment in which larger suppliers have the upper hand in many regards. Opportunities for small suppliers, such as those with a unique, patented component or those that are very tech-savvy, remain.
All automotive suppliers, regardless of size, find themselves facing a business environment more challenging than any they have previously experienced. The economies of scale realized from being big is just one of numerous strategies that can be used to cope with the demanding nature of today's automotive industry.