Brands Protected as Parts Commonized

Ward’s spoke in early June with Peter Rosenfeld, executive vice president-Procurement and Supply of DaimlerChrysler Corp., as part of its annual interviews with the U.S. purchasing executives. In the interview, he discusses the proposed new supplier relationship for the upcoming Jeep assembly plant in Toledo, as well as general purchasing issues.

An interview with General Motors Corp.’s Bo Andersson appeared June 30, and an interview with Ford Motor Co.’s Tony Brown was published on July 1. Transcripts will appear July 6 for Toyota Motor Corp.’s Andy Lund and Simon Nagata and July 7 for Honda Motor Co. Ltd.’s Larry Jutte. Excerpts from all five appear in the July issue of Ward’s AutoWorld.

Ward’s: How has the change in the alliance with Mitsubishi Motors Corp. and Hyundai Motor Co. Ltd. impacted your operations? What are you seeing that has changed?

Rosenfeld: I anticipated the question, and I wish for this question it could be a month after now. The dust really hasn’t settled on it yet to know exactly what the impact is going to be. In the meantime, the projects we’re working on – for example, the C- and D- (segment cars) will continue on. I guess you could call it more of a holistic relationship with Mitsubishi, and it will change now. We just aren’t certain yet from procurement and supply exactly what that means.

Ward’s: How close are you to signing contracts with suppliers on the Toledo project? When are we going to see the ink dry on those?

Peter Rosenfeld says Chrysler has no plans to amend its terms and conditions for supplier contracts.

Rosenfeld: We still have some fundamental issues to work out there in terms of how the structure will be laid out together with labor, government and so on. We have a very good idea of who the final supplier candidates are for that project. We’re looking at various elements of the program – body shop, rolling chassis and so on. We have a very good idea of who is the leader within a particular element. Again, if you had come a month later, I could have told you that.

Ward’s: So you expect to have contracts signed within a month?

Rosenfeld: That’s my expectation. At least if not contracts signed, I would say we would be into negotiations. There are two parties doing a contract. I know you would love to have a definitive black-and-white answer, but it takes two to tango. So we will be pursuing contracts.

Ward’s: Don’t you have to get moving if you want to get the plant up and running (by 2006)?

Rosenfeld: We will.

Ward’s: You mentioned the rolling chassis. There hasn’t been a rolling chassis program since the Dodge Dakota in Brazil. When I think rolling chassis, I think of Dana Corp. They’re in Toledo and did the rolling chassis in Brazil. Will Dana be your chassis supplier?

Rosenfeld: It’s true Dana did work with us in South America and had experience with a rolling chassis. It’s also true that Dana is in Toledo, but I won’t comment on the specifics of which suppliers we’re considering for the project.

Ward’s: But you are considering a rolling chassis for that?

Rosenfeld: We are looking at that. Correct.

Ward’s: What are the UAW implications if suppliers run the paint shop and body shop? Would they be supplier employees or DaimlerChrysler employees, and be paid the same rate as Chrysler employees?

Rosenfeld: Those are the kinds of details that we are working on. I think I can make the generic statement that as part of the labor negotiations that were concluded fourth quarter last year, discussions about what we were going to do in Ohio were part of those discussions. But the specifics of it I can’t tell you.

I think it is reasonable to say that for Toledo we are clearly pursuing a new way of doing things. We are looking at paradigm shifts in the way we have relations with suppliers here in North America, particularly in the U.S. It’s just a very different way of operating. I wasn’t trying to be coy with you about the contract. There is a lot involved. It clearly is not a cookie-cutter template for a contract like we’ve done before.

There are issues associated with labor. If we do a rolling chassis, how are we going to manage the whole logistics and supply of the incoming components and issues of who owns which component at which point in time? That’s all new stuff.

Ward’s: Beyond those three – paint shop, body shop and chassis – could there be other subsystems of the vehicle that would have suppliers actually in the facility?

Rosenfeld: Not completely clear yet. It is well known we are pursuing a modular strategy in some arenas. Whether those modules end up on site or not, too soon to tell.

Ward’s: What about a supplier park?

Rosenfeld: What we’ve been talking about with the chassis and the body and the paint, we’re calling that a supplier park.

Ward’s: Not necessarily in the plant itself?

Rosenfeld: Whether it’s under the same roof or at the same complex, that’s some of the details we’re working out. Whether there will be other suppliers within those confines is still under review. We’re land-locked, so it’s a question of space and how would we lay out that facility.

Ward’s: Didn’t Chrysler have a similar proposal for a plant in Windsor (Ontario)?

Rosenfeld: At Pillette Road. There was some discussion about such a program at Pillette.

Ward’s: For the Dodge M80 pickup?

Rosenfeld: I don’t think we ever announced what vehicle was going to go in there, but we did talk about that concept of a supplier park, where suppliers would own more assets than in a traditional manufacturing operation.

Ward’s: The United Auto Workers union is starting a campaign in Toledo, trying to get more suppliers organized. Are you working with the UAW?

Rosenfeld: I don’t know the specifics about what the UAW is pursuing in Toledo. As always, we’re open to working with the UAW to try to come up with the best solution. But I think Chrysler is showing that it’s making a significant commitment to Toledo by pursuing the supply park as it is. I think Chrysler is showing that it is, wherever possible, making a commitment to North America and to the U.S. specifically.

(For example) Keeping the Huntsville (Alabama electronics) plant here (sold recently to Siemens VDO Automotive) and in Ohio the Dayton (thermal systems) facility with Behr (GmbH) and keeping that here and New Castle (IN machining and forge plant) with Metaldyne as you’ve written about, keeping it here. (See related story: Buying OEM Component Plants No Picnic)

Obviously there were alternatives to all of that. Wherever we can do it and make it economically viable, we will do the best we can. Clearly, our actions have spoken to the fact that we’re committed to the U.S. as a viable economic model.

Ward’s: As you look to develop these new products for Jeep, do you as a procurement organization look at parts for Jeep in a different perspective than you do for Dodge and Chrysler and other parts of the organization?

Rosenfeld: As a procurement organization, we, like the rest of the organizations here, are intent on maintaining the brand identities that are unique to Dodge, Chrysler, Jeep and, in the global procurement organization, Mercedes. We do recognize that some components do differentiate the brands, so, yes, we pay attention to that.

We are not going to dilute the brand at the expense of, ‘Well, don’t you know it’s the cheapest component,’ or ‘Don’t you know procurement would rather go this way and engineering that way?’ We are not going to sacrifice the brands. We would never do that, so there are certain components that we are very careful on with Jeep that make Jeep unique. (See related story: Jeep Faces Tough Terrain)

The powertrain is an example, the 4-wheel-drive technology is an example of that, and we are very, very careful with that element of the vehicle as we are with all the other elements of the vehicle. But there are some components that aren’t necessarily Jeep – again, the ones that aren’t necessarily consumer discernible, that aren’t necessarily part of the unique Jeep trail-rated (reputation). For those components, wherever we can leverage global economies of scale, we will continue to do that.

The bottom line is, we will seek economies of scale but never at the expense of any of the DaimlerChrysler brands. Brand integrity is absolutely premiere.

Ward’s: On sourcing for the new 300 sedan, you’ve said you notice more supplier parent ownership is going overseas. Is the 300 program unique, or would any future vehicles that you are sourcing show the same type of trend?

Rosenfeld: Would you in general see that trend? Yes. But it depends on the type of vehicle. In the C-segment, for example, where we work closely with Mitsubishi, you’d see that trend. We’re in competition with the Big Six: Toyota, General Motors, Ford, Renault-Nissan, (DaimlerChrysler) and Volkswagen.

Those six comprise from maybe 85% to 90% of all vehicle sales globally, so we have to compete with them (the other five). They are going around the world looking for the best suppliers. So are we. It’s as simple as that. There is no directive at Chrysler Group that says you must (locate) in any given country. Contrary to what has been written before, we just ask our suppliers to be where they are competitive.

I personally am a big believer in efficient market theories, and that suppliers will locate where they are most competitive because they will eventually find out when they are not getting business that they are not competitive. One supplier, (which) happened to be a Japanese supplier, told me, ‘Of all the OEMs we deal with, you’re the one that’s the least insistent on a specific national location where we should be doing business. You’re the ones that don’t pressure us, and we are actually putting more business in the countries that the other guys are pressuring, for you than we are for them.’

I found that rather interesting. We’re just saying you have to be economically efficient. And the result is that top parents (suppliers) are winning business elsewhere and being more efficient here with their manufacturing.

Ward’s: How does China look right now as a region for sourcing?

Rosenfeld: It’s getting there. Frankly, China is not quite yet the powerhouse in terms of exports for vehicle components, yet there is some movement from components from China here. It’s not as dramatic as people would think at this point. It’s a combination of capacity and just raw materials. Their infrastructure isn’t at the point where it’s even supporting its own industry completely yet. I sort of liken it to Korea maybe 15 years or so ago. Everybody wanted to get stuff Korean, components from Korea, but it wasn’t quite there. The trajectory for China is dramatic, and I would expect within five years we’ll start seeing quite a bit of componentry coming from China into NAFTA, if not Europe as well.

Ward’s: You’ve been building Jeeps in Beijing a long time. How do you rate your supply base there? Are there a lot of parts you have to ship in just because you don’t have the adequate supply base set up in and around China?

Rosenfeld: The supply base there is adequate for that market in general. In fact, it’s growing by leaps and bounds. There are so many suppliers that if they aren’t homegrown in China, so many global suppliers are there now there’s not so much an issue anymore. All of the big players are there – all the big interior suppliers, the big chassis suppliers.

The logistical costs to get components from China over here don’t make the case quite yet. It’s sort of on the edge. Within the next five years, depending upon which components – electronics, I guess (could be exported from China to the U.S.). Clearly, so much of what you and I buy here in the U.S. comes form China now. It’s only a matter of time (before car parts are imported from China).

Ward’s: With Beijing hosting the Olympics, we understand the Beijing Jeep plant will be taken over for construction of athletic fields, and you’ll get a new Jeep plant in Beijing. Will there be a new sourcing arrangement for the new plant?

Rosenfeld: I am going to China the week of July 17 to discuss these issues and how we manage our activities in China. Not only Chrysler, but DaimlerChrysler as well. So I can’t give you the specifics now. But we do expect in China for some of our global partners to support us there as well.

Ward’s: Some suppliers can tell us what percentage of their purchasing comes from low-cost regions of the world and what that percentage will be in five years. Is there a comparable percentage you could quote for Chrysler?

Rosenfeld: From 2002 to 2007, the largest growth we have in top parent (supplier) ownership is Asia, followed by Europe, followed by Mexico. Actually, I could tell you we are doing quite a bit more in South Africa as well because of the work we do as DaimlerChrysler in South Africa as it relates to precious metals and leather and things like that. So our business in South Africa during that period will actually double. And top parent ownership of U.S. (supplier) companies will continue decreasing. That’s where the growth is with us.

Ward’s: When you say Europe, do you mean Eastern Europe?

Rosenfeld: I mean European Union. Eastern Europe sourcing is more with our European operations than it is here, per se. But we are starting to look there also. Again, there are a couple of issues there. Part of it is infrastructure, and part of it is logistics costs. Our key suppliers that are global suppliers are there, if not moving there. And we are exploring those alternatives.

Ward’s: You said in January you expect Chrysler to be the preferred customer of your suppliers. Are you seeing any evidence of that or any shift in the course of the past year or so? (See related story: DC Demands ‘Preferred Customer’ Status)

Rosenfeld: In some cases yes, and in some cases no. It’s a mixed bag. Where suppliers can keep growing with us, those are the suppliers that are treating us in a preferred manner. With Faurecia (SA, a French supplier), for example, we wouldn’t be moving business to that company if we believed we weren’t getting preferred treatment. We will continue to tell suppliers where they’re performing well and not well and what we expect of them.

That approach from my perspective works. It’s a data-driven approach to relationships. I had one of our ‘traditional American suppliers’ tell me last week, ‘You’re the only company that I deal with here in North America where we don’t have this emotional, visceral type of relationship. We understand where we stand with you. We may not like what we hear, but we do understand where we stand with you and will work that way.’ It doesn’t mean that relationships can be completely data driven. Preferential treatment doesn’t come strictly from data.

Ward’s: Did you have any involvement in sourcing for the Mercedes GST in Alabama?

Rosenfeld: We don’t directly manage that. That’s managed through Mercedes. There are some aspects of that program in which we were involved. Steel procurement is an example where we work together with Mercedes for Alabama. There are other elements of that program where we are getting commonized components where we worked together.

Clearly the direction for the Mercedes-brand vehicle is managed out of the Mercedes organization. But under the umbrella of global procurement, there are elements of that in which we were involved. For example, we worked with Mitsubishi and Mercedes and Chrysler to significantly reduce the number of door latches we have, to the point where we basically will have a common door latch among all the brands.

Ward’s: How many latches did you have?

Rosenfeld: Among the three brands, before we started this, actually 17 or 18. This will be a common latch on 5.5 million units. That’s a significant difference. I gave you an example before about commonization of fuel pumps. Are we working on the GST directly? No. We do the strategy for where we are going with fuel pumps down to the three that we are going to have. And then each one of the brand procurement organizations support their engineering activities to come up with a compilation of components that make up that vehicle.

Ward’s: We’ve heard a lot about GM and Ford amending their terms and conditions regarding supplier contracts. Has Chrysler Group amended its terms and conditions?

Rosenfeld: No, we don’t have a plan to amend our terms and conditions significantly. They tend to evolve. I think one of the reasons you don’t hear much about Chrysler compared to GM and Ford is because we are very sincere in trying to manage our relationships one at a time. And if we have an issue with a specific partner, we try to work that out with that partner. Yes, we do have terms and conditions on every purchase order, and we try to manage using those.

But if there are specific issues because of a complicated relationship, we work them through. For example, at Toledo (new Jeep plant), we won’t be able to use standard terms and conditions for that, so we’ll work our way through that. Each relationship is unique. If you talk to some of our suppliers, hopefully what they will tell you is, ‘Yeah, I understand what the requirements are from the Chrysler Group, and I am working to try to resolve the issues I have.’ And we try to work with them.

(See related story: Jeep Revives Rolling Chassis)