Many suppliers believe they're on the cutting edge as the auto industry goes global. What they don't realize is that the cutting edge could be a very sharp axe aimed at their necks.
The 1990s is the decade of the mega supplier, and survival of the fittest, Timothy D. Leuliette, president, ITT Automotive, warns the Society of Automotive Analysts. When it's over there will be a lot more bodies lying on the battlefield, he says. Right now there are 2,500 independent Tier 1 suppliers serving 28 automakers. More than 30,000 Tier 2 and 250,000 Tier 3 and 4 suppliers support them. That's too many to divide up the global pie.
Of the 2,500 Tier 1 companies, only about 100 are becoming full-service mega suppliers, which Mr. Leuliette says "will become the cornerstone of the vehicle producers' supply base in the next century." They will choose companies that are lean, low-cost, responsive and growing faster than the industry average to service them.
Meantime, the big global multi-product suppliers face drains on their profitability as they struggle to become full-service. Mr. Leuliette predicts price cuts and higher labor costs will amount to 68% of the average multi-billion dollar global supplier's operating income.
Those suppliers reduced prices about 3% in 1994, or about 43% of the average 1993 pre-tax income of the average global supplier. Total labor costs -- wages and benefits -- increased about 4% worldwide in 1993; or almost 25% of the average supplier's pre-tax income.
The good news is that by increasing productivity and streamlining the average supplier was able to cut costs enough to equal 36% of the 1993 operating income.
These big suppliers in turn asked their suppliers to cut material costs. That improved profitability by just over 2% of sales, or 32% of operating income.
"For the average supplier, these two actions just offset the impact of price reductions and labor-cost increases," Mr. Leuliette says. That combined with new technologies and higher volume added about 1.5% to the average supplier's margins in 1994, he says. "We figure the average supplier in 1994 took 15% to 20% of year-to-year incremental sales to pre-tax income, increased operating income by over 1% and finished the year with operating income at about 8% of sales, a 25% improvement over 1993."
How suppliers manage this profit equation will determine who survives and who doesn't.
"This is no time to devise protect and defend' strategies," Mr. Leuliette says. "You had better focus on 'build and create' strategies or exit the game. To beat your chest and pat yourself on the back for being globally competitive in one or two critical key success factors will get you the same accolades in the worldwide marketplace as will be afforded a leftwing liberal special-interest group in a Newt Gingrich congressional subcommittee hearing."