Green Day

Prices at the pump clearly are high enough to make fuel economy a primary concern for U.S. vehicle buyers today.

And about 29% of suppliers say they will reap benefits as Ford Motor Co. and General Motors Corp. proceed with an ambitious rollout of hybrid-electric vehicles (HEVs) in the coming years.

These are among the key findings in Ward's 28th Annual Supplier Survey, conducted this spring. Participating were 338 industry representatives — all of them Ward's readers, including 157 supplier employees and 181 from the OEM ranks.

This year's survey includes a series of questions addressing the subject of fuel economy, an expanding roster of available HEVs and the Big Three's push for flex-fuel vehicles (FFVs) that can burn corn-derived ethanol, or E85, as well as gasoline.

There are about 6 million vehicles on the road already capable of running on ethanol, and the Big Three vow to double the annual production of FFVs to 2 million by 2010. Problem is, there are only about 800 E85 fueling locations in the U.S.

Still, about 40% of supplier and OEM participants in this year's survey agree alternative fuels such as E85 will give U.S. auto makers an effective platform for competing with HEVs currently on the road.

However, an OEM reader points out ethanol will be a viable fuel only if there are enough accessible filling stations.

Another OEM participant notes fuel economy suffers when an FFV uses ethanol. “Once consumers realize this, they'll pay the extra for gasoline,” he writes. “Unless ethanol is 40% to 50% cheaper than gasoline, it is not economical to purchase since your vehicle will get 30% worse MPG (miles per gallon) than with gas.”

One route toward great fuel efficiency — at least in Europe — incorporates the increasingly popular diesel engine.

Judging by this year's survey, respondents think diesels will continue to face an uphill climb persuading North American consumers that today's diesel looks — and smells — nothing like the smoky, clattery mill of 25 years ago.

About 60% of supplier and OEM respondents agree diesels will continue to sell in small numbers in the U.S., even though they are extremely popular in Europe.

Some survey participants note diesel fuel is more expensive in the U.S. in relation to gasoline than it is in Europe and harder to find than regular unleaded gasoline.

Readers cannot seem to forget GM's diesel blunder two decades ago. “GM in the 1980s destroyed diesel potential for at least another 10 years,” an OEM survey participant writes. “Many Americans have a bad impression of diesel vehicles,” a supplier reader adds. “No auto maker is willing to invest in diesel in the U.S.”

But a host of written remarks from survey participants suggests a groundswell of enthusiasm for new diesel engines, which, despite burning much cleaner than even a decade ago, will be increasingly difficult to sell in the U.S. in coming years due to stricter environmental regulations.

“The U.S. is ready for diesel,” writes a supplier respondent. “If clean diesel cars are made available in the U.S., they will sell,” says another.

A number of survey participants single out Volkswagen AG's TDI turbodiesels as being fun to drive, while achieving outstanding fuel economy.

“VW TDI diesels are the wave of the future,” writes a respondent. “Diesel vehicles are not being made available (in the U.S.) to the extent they are in Europe. That needs to change.”

Survey participants say it is only a matter of time before Americans fall in love with diesels. “The government should give credit to high-mileage diesels the same as they do for hybrids,” a supplier respondent writes. “Our clean-air standards need adjustment to permit diesels,” says another.

“If fuel economy continues to be such a high priority, diesels will gain wider acceptance,” a supplier reader says. “The Big Three have to commit marketing dollars… GM and Ford have to offer small/midsize diesel options.”

Likewise, an OEM reader calls it “stupid to outlaw diesels in the U.S. (e.g. in California),” by way of environmental regulations. Another OEM reader considers diesels a better solution than HEVs, while a third OEM reader prods the Big Three to move forward with diesels for light-duty pickups.

“The U.S. should be developing diesel technology. Again, (they are) missing the targets,” an OEM reader says. “I think there is a market for diesels in North America that OEMs fail to satisfy.”

The survey also identifies an apparent disagreement as to how readily auto makers embrace supplier technology in confronting fuel-economy issues. Some 46% of OEM respondents say auto makers are seeking supplier input on fuel efficiency, compared with only 23% of suppliers that say so.

Overall, survey respondents agree the auto industry must put vehicles on the road that achieve much better fuel economy.

“All alternative fuels must be explored for the good of our Earth and our country,” writes an OEM respondent.

Toyota, Chrysler Most-Preferred OEMs

If Toyota Motor Corp. needs affirmation that its strategy to collaborate with suppliers is working, it should review the findings of the 28th Annual Supplier Survey, conducted this spring for Ward's.

Japan's No.1 auto maker ranks first among 79 Tier 1 supplier representatives who were asked to identify their three most-preferred auto maker customers.

With 51.9%, Toyota tops Daimler-Chrysler Corp. (46.8%), which is widely recognized for improving the supplier/OEM relationship in the 1990s.

Chrysler's crosstown rivals also fared well in the survey. Ford Motor Co. and General Motors Corp. (at 44.3% and 38.0%, respectively) beat out Honda Motor Co. Ltd. and Nissan Motor Co. Ltd. for the No.3 and 4 slots in the survey.

The study was conducted between May 2 and June 16 by Prism Business Media's Marketing Research Dept., a corporate sibling of Ward's based in Minneapolis, MN.

The sample was constructed carefully to ensure a broad cross-section of suppliers.

For instance, to prevent the large organizations of Delphi Corp. and Visteon Corp. from skewing results, participation of employees from each of the two companies was limited to 1.5% of the sample.

Overall, 157 supplier representatives answered the question from all tiers of the supply chain. However, Ward's factored out the 78 non-Tier 1 responses, because Tier 1 suppliers deal most directly with OEMs and are in the best position to answer the question.

With all 157 responses tallied, the top four players were the same, in slightly different order.

Ranking No.1 was DaimlerChrysler, followed in order by Toyota, General Motors and Ford.

The survey findings conflict slightly with the Working Relations Study released recently by Planning Perspectives Inc. in Birmingham, MI.

The Planning Perspectives study asks the question: “Based on your firm's working relations with the OEM and assuming equivalent sales and profits from each OEM, to what degree is the OEM a preferred customer?”

The question is asked with regard to North America's top vehicle producers: GM, Ford, Chrysler, Toyota, Honda and Nissan. For the past five years, the scores have changed but the rankings have been the same in the Planning Perspectives study: Toyota has been No.1, followed in order by Honda, Nissan, Chrysler, Ford and GM.

Planning Perspectives President John Henke Jr. says the divergent results reflect the nature of the individual queries.

The Ward's question draws a connection to a supplier's revenues and profitability, so suppliers with significant Big Three business are more likely to score GM, Ford and Chrysler higher than in the Planning Perspectives study, which looks more specifically at the health of the working relationship, Henke says.

“We both have very legitimate and accurate results,” he says. “These results are reasonably consistent.”

Meanwhile, a few respondents to the Ward's question wrote in other answers in identifying with whom they prefer to do business: Mazda Motor Corp., BMW AG, Hyundai Motor Co. Ltd., Kia Motors Corp. and Fuji Heavy Industries Ltd. (Subaru).

Chapter 11 Heightens Anxiety

Bankruptcy is pervasive in the North American automotive supply chain, as it grows increasingly common to continue doing business while under the protective legal shelter of Chapter 11.

Half of supplier respondents and more than 68% of OEM respondents to Ward's Supplier Survey say their companies do business with parts makers that now are or recently were in bankruptcy.

Auto industry analysts have identified more than 30 bankruptcies filed on behalf of suppliers they track. The latest Ward's survey, however, suggests the number is much higher, perhaps when including smaller Tier 2 and 3 suppliers that draw less attention.

Responding to the question were 157 supplier representatives and 181 OEM employees.

Chapter 11 is a court-supervised process that allows a company whose debts exceed its assets to stay in business while it reorganizes, with an eye toward restoring long-term profitability.

The goal is to create an orderly procedure that allows for employees and lower-tier suppliers to continue being paid, while parts shipments to customers go on uninterrupted.

In reality, however, the term “bankruptcy” is so emotionally charged that it feeds suspicion about corporate mismanagement, job security and a company's viability. Assurances from a bankruptcy judge only go so far.

For instance, nearly a third of supplier respondents to this year's survey say their companies are finding it difficult to get paid by supplier customers that are bankrupt.

Likewise, more than 22% of OEM respondents say their companies are finding it difficult to get components delivered from bankrupt suppliers.

“Last year was a loss due to customers' bankruptcies,” a supplier respondent writes.

Delphi Corp., the No.1 supplier in the U.S., filed for bankruptcy last October, while Federal-Mogul Corp. has been in Chapter 11 for nearly five years. The impact of those two bankruptcies is enormous, a supplier respondent writes.

“Banks are not willing to provide a line of credit to suppliers who are too heavily exposed to Delphi, Federal-Mogul and others,” he says.

As bankruptcies heighten anxiety within the supply community, change is inevitable.

“People adjust — even customers,” a supplier respondent writes. “Organizations only change with failure or inspired leadership. The latter is rare. Forced rebirth is preferable to slow death.”

One supplier participant says his plant is closing this summer due to bankruptcy, and another writes his company emerged from Chapter 11 a year ago. “Now we need to turn a profit.”

The customer mix also is changing for a number of suppliers as they seek more stable — and in some cases more profitable — business.

“Our sales have shifted from 80% OEM and 20% aftermarket to 20% OEM and 80% aftermarket,” a supplier respondent writes. “We will survive.”

The possibility that one or more of Detroit's auto makers also could end up in bankruptcy is stirring fear within the industry, as well.

Some 22% of OEM respondents say they fear their own company may declare Chapter 11 in the near future, and half of supplier respondents agree a Detroit auto maker in bankruptcy would be devastating for their companies.

“Our biggest customers are Ford and GM. If they stopped paying us…” a supplier respondent writes, apparently afraid to finish his thought.

An OEM participant says auto makers and suppliers depend on each other. “We can't survive without our suppliers, and they need us,” he writes. “If we outsource too much, then all cars would technically be imports.”

Health-Care Reality Sinks In

Unless the U.S. auto industry can reverse the tide of global economics and regain long-term domestic profitability, it appears the generous employee health-care packages of years past are destined for the scrap heap.

For the second straight year, more than 70% of respondents to the Ward's Supplier Survey say their health-care coverage is less comprehensive than it was five years ago.

And like last year, an overwhelming majority from both the OEM and supplier ranks says rising health-care costs make it more difficult for their companies to compete globally.

The hot-button issue generates significant written comments from survey participants who say the need for nationalized health care is urgent.

However, more than half of OEM respondents and a resounding 78% of supplier participants say the U.S. government should not subsidize Big Three health-care obligations so those auto makers can compete with foreign companies that do not face such burdens.

“The government should not be held responsible for what the auto makers offered workers,” a supplier respondent writes. “Early retirement with full health care and no deductibles is ridiculously expensive.”

An OEM participant, however, sees nothing wrong with pressing for government intervention.

“Auto makers were hailed as good corporate citizens by providing health care and other benefits to its employees,” he writes.

“Our government does nothing to help the 45 million Americans with no health care, but it is good at letting American jobs leave this country.”

The government needs to step in, some respondents argue, but only to help regulate costs nationwide.

As was the case in last year's survey, participants this year — who tend to represent white-collar sentiments — say the United Auto Workers union needs to be part of the solution by accepting some of the financial burdens of individual health care, while leaving strident demands at the door.

“How can you ask the government/taxpayers to bail out the gold-plated benefits of the UAW members when they get better benefits than most everyone else in the country?” an OEM respondent asks.

Roughly half of supplier and OEM participants view blue-collar workers at their companies as unwilling to share in additional health-care costs and oblivious to economic reality.

“Some understand economics, many do not. Most seem to be out of touch with what adjustments will be done to survive,” a supplier respondent writes, adding that blame must be passed up the corporate ladder as well. “Management has no credibility in the eyes of blue- or white-collar workers.”

The pain of paying for health care needs to be spread evenly out of fairness, many respondents say.

“We need to stop coverage for retirees over 62 who are Medicare eligible,” an OEM participant writes.

“Socialism isn't the answer,” another writes. “UAW member benefits must be the same as the benefits of white-collar workers,” who already pay a greater portion of their health-care expenses.

A few participants defend the UAW's position with regard to health care, noting the union's approval of GM's plan last year to slash annual health-care costs by about $3 billion on a pre-tax basis.

“If it saves the company,” an OEM participant writes, “they (UAW members) are willing to help.”

Still, many survey participants point to unpopular realism.

“Free health care is a thing of the past,” a supplier respondent writes.

How the Survey Was Done

Ward's corporate sibling, Prism Business Media Marketing Research Dept., collected data for the 28th Annual Supplier Survey between May 2 and June 16.

Prism Research selected the original sample from the magazine's readership and sent questionnaires to those in the corporate management, engineering, design, quality, testing, manufacturing and purchasing ranks.

Some 2,400 surveys were mailed — 1,200 to OEM readers and 1,200 to supplier readers. The finished survey consisted of 157 responses from suppliers (for a 13.2% effective response rate) and 181 from OEMs (for an effective response rate of 16.1%).

This represents the seventh year the research division has conducted the Supplier Survey for Ward's.

As in previous years, the OEM sample mirrors the North American production market-share breakdown: General Motors Corp. produced 28.8% of the vehicles in 2005, so 28.8% of the OEM sample comes from GM employees. All North American producers, including the foreign-based transplants, are represented in the same way, including Ford Motor Co. (19.4%), DaimlerChrysler Corp. (17%), Honda of America Mfg. (8.6%), Toyota Motor Mfg. (7.6%), Nissan Motor Mfg. (7.6%) and other OEMs (11%).

A wide range of Tier 1, 2 and 3 suppliers participated. Some 50% of respondents describe their companies as Tier 1s selling directly to auto makers, while 31.8% describe their companies as primarily Tier 2. Of the supplier respondents, 28.7% say their companies have annual sales of $1 billion or more, and 47.8% have sales of less than $250 million.

Basing the sample on North American OEM production market shares and ensuring diverse supplier responses allows for the survey to accurately reflect the industry at large.

Cost Remains Paramount in Relationship

SUPPLIER COMMENTS

OEM COMMENTS

OEM Respondents Vent About Their Companies