THE YEAR: 2010 THE NEWS REPORT: One week ago, a consortium of the 15 major global suppliers presented the five remaining global vehicle manufacturers their terms for doing business. The terms included standardization of specific products across manufacturers, non-negotiable prices, quality improvement standards and conditions for manufacturer-initiated engineering changes and delivery schedule changes. Today the Global Vehicle Manufacturers Association (GVMA) accepted the consortium's terms. This acquiescence by the GVMA to suppliers' demands clearly indicates that the power of the manufacturer-supplier relationship in the global automotive industry is now in the hands of the suppliers.
Far-fetched or reality? Today, many suppliers and consultants believe that the balance of power between the OEMs and suppliers has begun an irreversible shift from manufacturer to supplier. There is good reason to believe this will happen.
With increasing frequency, manufacturers are outsourcing work that requires suppliers to broaden engineering and manufacturing capabilities. Many larger suppliers also are being asked to provide more modules and systems, which requires them to act as system integrators, with even more complex engineering and manufacturing.
To meet these needs, suppliers are broadening their capabilities through mergers and acquisitions. The end result is that production and technical capabilities are being transferred from OEMs to suppliers and consolidated in the hands of suppliers who are becoming larger in size and greater in capability as they become fewer in number.
The few remaining suppliers, it is argued, eventually will be able to dictate to the OEMs their terms for doing business. And the OEMs, because of a dependency on these few suppliers, will not have the option to negotiate, let alone decline, the terms.
Many supplier executives, chafing under what they consider to be years of unfair treatment by OEMs, are anxiously looking to the day when they can tell the purchasing personnel of these OEMs how business will be conducted. The worm will have turned!
Unfortunately, this day will not come. In fact, even the day when the playing field is level between the two players will not come. OEMs will continue to hold the power in the manufacturer-supplier relationship for two basic and fundamental reasons:
1) The increasing role of OEM purchasing personnel as risk managers; and
2) The suppliers' self-interest.
As the number of suppliers decreases, the management of risk by purchasing personnel will encompass broader strategic issues. As capabilities become concentrated in fewer suppliers, there comes a point when each OEM will take steps to ensure that it is able to continue choosing its vendors. These steps could include giving a minor supplier a major contract.
OEMs have acted in this manner in the past. Not too many years ago many thoughtCorp. and Johnson Control Inc. would become the world's predominant interior suppliers. Then International was awarded a contract. Now there are three major North American interior suppliers.
The same thing has happened in Europe wherewas recently awarded a $500 million seat contract. Does this suggest that some OEM on each continent has its eye on a fourth interior supplier who is waiting in the wings for a major contract? What better way to further erode the power of the current major interior suppliers?
It also is not unreasonable to expect an OEM, concerned about suppliers getting too much power, to bring some currently outsourced work back inside to reduce its risk. The ebb and flow of outsourcing between OEMs and suppliers makes such OEM actions quite feasible, as suppliers of a specific component or system reach a critical minimum number.
Each supplier's self-interest in revenue and profit growth also will constrain the suppliers' ability to wrest power away from OEMs. As growth slows, remaining suppliers will have to look to new business for growth. The need to look to new opportunities will be further intensified if OEM mergers continue.
With growth opportunities for current products limited, and fewer OEMs with whom to do business, the major suppliers will have no choice but to expand into new areas to satisfy their need for growth. And OEMs will subsequently find, without looking too hard, new willing and capable suppliers with whom to conduct business.
Some may argue that suppliers, recognizing that they are gaining a more powerful position with the OEMs, will not engage in self-defeating activities. Several prognosticators say that major suppliers will form a consortium, working together to maximize joint returns rather than allow themselves to continue to be the foil of the OEMs. Such a consortium would essentially be a cartel.
Notwithstanding legal ramifications of doing so, this cartel, like every cartel in the history of man, will fail. Remember the oil cartel of the early '70s? Look at it today.
One can argue that different countries with different political agendas brought about its self-destruction. Consider then the coffee cartel, which was predominately comprised of Brazilian companies. It too failed.
In the short term, if OEM purchasing personnel fail to properly manage their risk, a consortium may succeed. In the long term, however, the suppliers' self-interest will cause a consortium to fail.
Even if OEMs and their purchasing personnel fail to recognize the need to conscientiously manage the risk associated with a decreasing supply base, the self-interest of the suppliers, as large and as concentrated as they may become, will not permit the power in the OEM-supplier relationship to shift. Wishful thinking not withstanding, the OEMs, as always, will continue to be the more powerful of the two.
Of course, as has been suggested, the suppliers could get together and simply end-run the OEMs by starting their own automaking operations. But now they would be one of them. So, will they act any differently toward their suppliers? I doubt it!