Supplier sequel? Some see history repeating itself

Does history repeat itself? A close look at 100 years of supplier-automaker relations reveals that ghosts of the past are reappearing, although they're taking on a different form.

In the beginning, suppliers such as Henry M. Timken, Arthur Oliver Smith, Albert C. Champion and the Dodge and Fisher brothers sold parts to the early automakers that they designed and manufactured themselves. Later, the automakers bought out some of these suppliers so they could control the parts that went on their vehicles. Meanwhile, other suppliers joined forces to create larger and more capable companies.

In the 1990s, automakers are returning design and engineering responsibility to suppliers for the components and systems they provide.

Will automakers eventually return to vertical integration? That's not likely, say industry watchers, but the trend by larger suppliers to acquire smaller companies to give them systems capability and global presence closely resembles industry history.

"There won't be a wholesale return to vertical integration," says David E. Cole, director of the University of Michigan's Office for the Study of Automotive Transportation, who adds that the consolidation among Tier 1 suppliers takes the place of vertical integration from a historical perspective.

"It will not be vertically integrated like it was after World War II. The advantages are less and less with the lower vehicle volumes," says Thomas T. Stallkamp, Chrysler Corp. executive vice president for procurement and supply. "No one's ever good at doing everything themselves."

Robert W. Udell, chairman of the APX International engineering services company and a 56-year industry veteran, agrees with Mr. Cole. "The Tier 1s, by trying to buy up companies that match or complement their expertise, are doing what the manufacturers used to do."

Many historians trace the beginnings of the automotive supplier industry to the 1901 fire that destroyed the Detroit factory of the Olds Motor Works. Only one experimental curved-dash roadster survived. Legend has it that to get back in business after the disaster, Olds had no choice except to use that car as a model and to subcontract orders for parts and sub-assemblies to small shops in the Detroit area.

Although that's a delightful tale, companies were supplying parts to automakers long before the Olds conflagration. Many visionaries saw the emerging auto industry as an opportunity to at least expand their businesses.

Mr. Timken was a carriage spring manufacturer in 1898 when he invented the tapered roller bearing, which forever changed the design of load-bearing shafts and axles. His son, William R. Timken, took the business to Detroit in 1909 (it's now based in Canton, OH, and descendants of the founder remain active in management).

When Goodyear Tire & Rubber Co. began production in 1898, it made bicycle and carriage tires, horseshoe pads and poker chips.

In 1899 Mr. Smith, founder of A.O. Smith Corp., fabricated the first pressed-steel automobile frame in the U.S. By 1906, the company was delivering 10,000 frames a year for the Ford Model N. A.O. Smith today remains a major frame supplier.

John and Horace Dodge first built bicycles in their hometown of Niles, MI, and got their start in the embryonic auto business by making transmissions for Olds Motor Works in 1901 and 1902. In 1903 the Dodges began supplying most of the major mechanicals for the newly organized Ford Motor Co. in return for stock. They cashed out of Ford with $25 million in 1919, but not before they began making their own cars in 1914 under the name Dodge Brothers Inc. (Chrysler acquired Dodge from their heirs in 1928).

He wasn't the first of the early automakers to vertically integrate his company, but General Motors Corp.'s William C. Durant was among the most aggressive. He absorbed New Process Gear Co., Warner Transmission Corp., American Plate Glass Co., and Adams Axle Co. when he was assembling GM. Mr. Durant later added Charles F. Kettering's Dayton Engineering Laboratory Co. (Delco), which designed and manufactured ignition systems for Cadillac before becoming part GM. The General also added Mr. Champion's AC Spark Plug to the mix, although Champion remained an independent company.

In 1919, GM bought an interest in Frederic Fisher's Fisher Body Co. while Nash Motors Co. was picking up an interest in Seaman Body Corp. By 1926, GM owned Fisher Body outright, and it remained a GM property until dismantled during GM's huge 1984 reorganization.

In the past several months, the Bosch Group purchased AlliedSignal Automotive's foundation brake and antilock braking business and Lear Seating Corp. (recently renamed Lear Corp.) acquired Automotive Industries Inc., just to name a couple of the major supplier consolidations. This closely mirrors what took place in the industry's formative years.

In 1914 lawyer Charles Dana bought controlling interest in Clarence Spicer's financially troubled Spicer Universal Joint Manufacturing Corp. for $25,000. Although his breakthrough universal joint design had become the industry standard for power transmission, Spicer's company was pushed to the brink of bankruptcy due to too-rapid expansion. Spicer, of course, is now part of Dana Corp.

Mr. Dana took over A.P. Warner's speedometer and electric brake business and John and Joseph Victor's Victor Manufacturing and Gasket Co. Today, Dana is one of the world's largest automotive suppliers and continues to briskly acquire companies around the world.

In 1927 Clarence B. Hayes and John Kelsey, who led separate businesses in the successful switch from carriage to car wheels, merged to form Kelsey-Hayes Co., now part of Buffalo-based Varity Corp. Varity recently agreed to sell its stake in Hayes Wheels International Inc. to facilitate a Hayes Wheels merger with Motor Wheel Corp.

In 1928 Warner Gear Co. -- which was founded with an order for 4,000 differentials from Olds and eventually would produce rear axles, steering gears, clutches and transmissions -- merged with Charles W. Borg's farm equipment and clutch manufacturing company to form Borg-Warner. Marvel Carburetor Co. and Mechanics Universal Joint Co. would join the fold later.

Torbson Gear & Axle Co., which opened for business in 1911, bought a heavy-duty axle shop owned by Joseph Oriel Eaton in 1920. By 1932, the company's name was Eaton Manufacturing Co. and today Eaton Corp. ranks among the world's largest automotive suppliers.

Most of the early suppliers were brilliant entrepreneurs who amassed large fortunes because of the innovations they brought to the industry.

One example is Charles Thompson, who in 1905 became the general manager of Alexander Winton's Cleveland Cap Screw Co. His new welding techniques dominated the early automotive valve business and led to the founding of TRW Inc.

Mr. Thompson's valves helped propel Charles Lindbergh and the Spirit of St. Louis on their historic flight across the Atlantic Ocean in 1927. TRW also manufactured the Apollo lunar module descent engine that allowed Neil Armstrong and Buzz Aldrin to land on the moon.

Obviously science and technology have brought automotive componentry a long way in the last 100 years. The way purchasing is done has evolved as well.

In his book How Detroit Became the Automotive Capital, Robert G. Szudarek says that automobile pioneers used to gather in the bar at the original Pontchartrain Hotel in downtown Detroit carrying parts such as fenders, headlamps, brakes and goggles into the bar to examine and discuss. When the palacial Detroit Athletic Club opened in 1915, that became the technology showcase. Now some 900 suppliers flock to Detroit every year and fill Cobo Center with elaborate exhibits during the Society of Automotive Engineers' annual Congress and Exposition.

The relationship between automakers and their suppliers has changed as well. It has gone from bellying up to the bar together at the old Pontch at the turn of the century to the dictatorial style of the last 50 years to more of a partnership.

"The team concept has changed the way cars are manufactured and sourced," says APX's Mr. Udell. "Suppliers are right in on the design. Program management is the new way. Designing it right the first time has really streamlined the way (OEMs) manufacture vehicles and control prices and quality."

Many optimistic automakers and suppliers believe the adversarial approach eventually will disappear, although it may take longer than originally anticipated.

"The system will always have tension in it," says U-M's Mr. Cole. "There will be a more stable supply structure. It'll be more of a managed process than it is today, particularly in the lower tiers. Better information and knowledge will be moving up and down. Standardization of the quality standards in QS-9000 is part of that."

Chrysler's Mr. Stallkamp agrees. "The supply chain needs to be managed as a unit instead of different tiers," he says. "The old way was command and control -- dictatorial. Now we want to control waste together and streamline the system."

Mr. Stallkamp says his vision for the future of OEM-supplier relations is less antagonism and more cooperation, despite the fact that the people running the show now all grew up in the old culture.

"People who develop (cooperative) relationships will have a strategic advantage," Mr. Stallkamp says. "We can't afford to go back to the old way."

As suppliers continue to consolidate, he says, they will start choosing their customers instead of the other way around. Win-win partnerships need to be forged with continual pressure to reduce cost, he adds, with continuous improvement and new technology helping keep costs down.

Mr. Udell interjects that automakers should fear too much supplier consolidation because competition drives lower piece and system costs.

In 1940, Arthur Pound's book Detroit: Dynamic City summed up the automaker-supplier situation of that day. And despite the changes that have taken place since, it still holds true to this day and for the future:

"The giant industry, you see, requires for successful functioning an enormous volume of orders, an accurately timed service of supply, and utmost concentration of attention at every step from initial design to completed product."