Selling to GM – A tough customer gets tougher

It's no secret that automotive suppliers regard General Motors as one tough customer. The automaker's relentless focus on cost-cutting has made few friends in the supplier community. GM recently made several announcements that may signal an even greater focus on price.

Over the last several decades, the Big Three have pushed an increasing amount of component manufacturing, engineering, and design on their suppliers. This dynamic is what led GM and Ford Motor Co. to spin off their partsmaking operations, Delphi and Visteon, as separate companies.

The financial pressure now facing the Big Three caused them to reverse this pattern. Ford currently is bailing Visteon out of its dire financial situation, is taking several facilities back into the company, and selling others off. GM and Delphi are now engaged in talks on a similar bailout for Delphi.

It can be argued that the developments with Visteon and Delphi are unique scenarios largely caused by the use of expensive UAW employees. While unionization is a factor influencing Ford and GM's decisions, the pattern of taking back engineering and design responsibility from suppliers is not confined to Delphi and Visteon, nor is it confined to unionized suppliers.

Taking Back Control

GM announced it won't contract with interior designers such as Johnson Controls, Lear, and Magna's Intier unit to handle complete interior designs. Until recently GM relied on suppliers to handle final interior components design, as well as source necessary components from other suppliers. It now plans to handle those responsibilities internally.

While such a move could result in greater competency in the field of interior design at GM, it's most likely pursued as a cost-cutting measure. GM believes it can control costs better by negotiating directly with each supplier, as opposed to having a supplier handle that responsibility. The automaker appears to believe that its interior suppliers were not passing on savings they negotiated with their suppliers further down the chain. In reaction to this move and partially because of poor recent financial performance, Lear, a major interior supplier, has stated it is considering pulling out of the interior business altogether. The company believes it can make more money selling individual components, such as seats.

GM also announced a plan to centralize its parts purchasing operations. In the past decentralized purchasing operations resulted in GM purchasing similar components from multiple suppliers. The automaker now plans to take advantage of greater economies of scale by streamlining its purchasing.

GM has assigned a single purchasing head to 113 different product areas. The manager of these product-focused groups (called Global Creativity Teams) may be located worldwide. GM has 160,000 part numbers worldwide, and if this program is successful, it will reduce part numbers and whittle down GM's supplier base to a smaller, lower-cost group that will be easier to manage.

U.S. Suppliers at Risk

Bo Andersson, GM's head of purchasing, briefed a group of automotive supplier executives at a meeting sponsored by the Original Equipment Supplier Association (OESA) last April. A major point Andersson emphasized was that "no further pricing cuts were required." However, Andersson also told suppliers they would have to compete with "global suppliers" and that the "footprint," or base of manufacturing, is shifting to fast-growing countries such as China.

A GM spokesman repeated Andersson's statement that "We are a global company and need a globally competitive supply base. Some suppliers may go to China; some may go to other countries in the world. We have very competitive suppliers in Michigan that can compete globally."

Regardless of the official interpretation subsequently GM suggested, the supplier community largely interpreted Andersson's remarks as further proof that GM is focusing on price to such a high degree that "world price" demands, as well as sourcing from China, were the true goals of Andersson's presentation.

Together, Andersson's remarks, GM's purchasing reorganization, and taking back interior design and purchasing point to a focused attempt to cut component prices. GM's price-driven approach, which is also visible at Ford and, to a smaller degree, at the Chrysler Group, has caused its suppliers to begin turning down contracts. The results of this approach are clearly visible in the Planning Perspectives survey results.

Supplier Survey Results

An annual survey of automotive suppliers prepared by Planning Perspectives Inc. is the industry's barometer of OEM/supplier relations. Planning Perspectives polls suppliers on the extent to which each automaker engages in mutually beneficial relationships and pressures suppliers on price, quality, and several other characteristics.

The results of this year's survey show that GM, as in past years, is the most difficult automaker to work with. GM received the worst rankings of any vehicle customer in almost every category. The survey indicated that GM had the worst working relationship and level of trust with suppliers of any OEM. It also revealed that the price pressure on suppliers is the highest of any manufacturer and the pressure for higher quality is the lowest.

GM is perceived to rank cost the highest and quality the lowest of any manufacturer when choosing suppliers. GM also was ranked the most unfair in supplier chargebacks or in providing opportunities to recover material cost increases. Finally, only 9 percent of suppliers ranked GM as one of their preferred customers, compared to 73 percent for Toyota and 65 percent for Honda.

The results of the Planning Perspectives survey reflect what many suppliers have been saying for years. GM's purchasing strategies hurt suppliers in the long run. As a result, suppliers are more likely to share their best technology and highest-quality products with other automakers.

While Ford and Chrysler were not ranked as low as GM, they were not nearly as highly regarded as Asian automakers. Until the Big Three manage their supply chains in a more mutually beneficial manner, suppliers will continue to focus their best products and most capable staff on the Big Three's competitors.