Drive for profits runs parts manufacturers off the road, study shows
August 29, 2002
The businesses that supply the auto industry with its parts are doing more and more work for less and less of the pie.
Traverse City, Mich., may be a laid-back resort town, but there was more than a little tension in the air recently as automotive suppliers aired their grievances to the North American industry's heaviest hitters.
The 2002 Management Briefing Seminars (MBS) hosted such industry titans as Ford Motor Co. Chairman and CEO Bill Ford, Chrysler COO Dieter Zetsche, and General Motors North America Chairman Bob Lutz, but it was a supplier who generated the biggest buzz with his speech "Detroit, We Have a Problem."
Tim Leuliette, chairman, president, and CEO of Metaldyne, an automotive supplier based in Plymouth, Mich., took advantage of his time at the microphone to chastise what he sees as the inability of Detroit's Big Three automakers to design vehicles that the public covets.
Leuliette said that the cars that appeal to his daughters and that have captured the market with style and charisma all are designed in Japan and Europe, even if they are built at transplant facilities in North America. He noted that, unlike the Asian and European OEMs, the Big Three have to sell their vehicles by relying on generous incentives and squeeze suppliers to make up the cost.
Marketable product, according to Leuliette, is the real solution to the difficulties the industry is facing.
"There is little chance that beating the hell out of the supplier base, breaking contracts, not paying your tooling bills is going to get to the root cause of your problem, Big Three," he said.
Leuliette then laid down the gauntlet by saying that suppliers couldn't be forced to absorb the increased cost of steel that has resulted from recent federal tariffs on hot-rolled, cold-rolled, and other steel products.
"If we must bring Detroit to its knees over this, so be it," he said to spontaneous applause.
OEM reaction to Leuliette's speech was understandably tepid. Leuliette was "just whining about the higher steel prices," General Motors CEO Rick Wagoner told Automotive News. "The automakers don't have any margin to give."
However preposterous the Detroit heavyweights found Leuliette's sentiments, those thoughts are echoed in a study recently completed by the Center for Automotive Research (CAR), Ann Arbor, Mich.
If asked, most automotive suppliers would tell you that even though they've had to knuckle under to automakers' demands to reduce their prices, they're also being asked to work harder for it.
Likewise, not only are individual suppliers responsible for an increasing amount of engineering and design work on the products that they build, but they also are building an increasingly larger proportion of the vehicles turned out by their OEM customers.
In other words, they're getting both pockets picked and having to smile about it.
CAR investigated the acknowledged migration of work toward suppliers and away from OEMs. This trend is accompanied by another, which would be unsettling to any supplier: As the amount of work done by suppliers has increased, their share of the total value (and profit) generated by the automotive industry has shrunk.
CAR used the total of personal consumption expenditures (PCEs) in the auto industry to stand for the total value of the U.S. automotive market. PCE is reported by the U.S. Department of Commerce's Bureau of Economic Analysis (BEA) for various industries and is the sum total spent by American consumers on a given good. Once the PCE is known, the size of the pie that is divided among automotive industry players can be identified.
The automotive industry PCE reported for the year 2000 indicates $432 billion worth of pie, an increase of 48.5 percent from the $291 billion reported in 1990 (see Figure 1).
Information from other sources, including government agencies and automotive industry groups, as well as results generated by CAR during previous studies, was used to fill in the share of PCE (referred to as light-vehicle sales) devoted to each function of the industry.
Advertising cost, dealership margin, and freight costs are subtracted from the 2000 light-vehicle sales of $432 billion to obtain the total value of the industry's vehicles after assembly.
The resulting $389 billion then is divided into two categories: OE Value Added and Materials and Other.
Suppliers function in the domain of materials. Their take in 2000 was $241.9 billion, or 56 percent slice of the $432 billion pie. It is important to note that this category includes the OEMs' own captive parts production, though both Delphi and Visteon already had been spun off from GM and Ford, respectively, at the time of the analysis.
The analysis gets interesting when you investigate percentage changes rather than the actual values.
The 48.5 percent increase in light-vehicle sales registered between 1990 and 2000 serves as the benchmark for all comparisons. How each category within the value chain fares when judged by that measure is an indication of that sector's ability to draw value from the industry.
The assembled-vehicle value increased by 52.5 percent from 1990 to 2000. However, the OEMs' share increased by 79.8 percent during that same period. The increased share taken by the OEMs cannot be attributed to rising labor costs, as the amount the OEMs spent on labor—a major component of their cost structure—increased by only 23.8 percent.
Spending on materials, the segment in which automotive suppliers function, increased by 42.5 percent, not much more than half of the increase the OEMs enjoyed.
Though the study does not delve into the amount of the value each function provides in the value chain, as opposed to the amount of value it receives in return, many studies indicate that suppliers supply an ever-increasing share of the vehicle.
There is common consensus in the industry that its members produce 70 percent to 75 percent of a typical car but do not attract a proportional share of the value that vehicle generates: Although the supplier sector is providing a larger share of the ingredients, it doesn't receive its share of the pie once the baking is done.