GM-PSA Sourcing Opportunities May be Fewer, But Richer, Suppliers Say

The PSA Peugeot Citroen partnership with General Motors promises richer paydays for some suppliers, but not all, industry insiders warn.

The tie-up, announced last week, will see platform consolidation accounting for 3.9 million B- and D-segment vehicles.

Such volume is enough to significantly enrich the coffers of suppliers that win sourcing contracts for the resulting new-vehicle programs. But those programs, by definition of the GM-PSA tie-up, will be fewer.

Expect the deal “to favor suppliers who have a more comprehensive global footprint and can handle global platforms,” says Steve Rodgers, president of the Toronto-based Automotive Parts Manufacturers Assn.

“You may provide the best quality, but if you’re not a global supplier, you may lose out,” he tells WardsAuto. “You’ve got to be bigger and more capable and more comprehensive.”

The pressure on suppliers to expand their horizons is not new. But the GM-PSA partnership signals a deepening of that trend, says David Cole, chairman emeritus of the Center for Automotive Research in Ann Arbor, MI.

“What everybody is searching for is to have high-capacity utilization on your manufacturing assets that are high fixed-cost. A complement to that is to have sufficient scale so that what you purchase, you can get an attractive price on.”

One also can be used as a lever against the other – an attractive proposition for Europe’s flagging industry. “There’s too much capacity for the size of the (European) market,” he says. “One way to deal with that is to try to get greater scale.”

But GM and PSA refute any suggestion that their deal is an attempt to sidestep rationalization. The benefits of the partnership represent “additional tools” with which GM will stem the losses at its hemorrhaging Adam Opel operations in Germany, says Steve Girsky, the auto maker’s vice chairman.

“The alliance is not about reducing overcapacity,” adds PSA Chairman Philippe Varin. But he notes the auto makers’ combined sales volume for 2011, some 12 million vehicles, is “unmatched.”

GM’s total light-vehicle production was 4.96 million units through the first three quarters of 2011, edging Volkswagen’s 4.91 million and Toyota’s 4.86 million, according to WardsAuto data. Factor PSA’s tally into GM’s output and they jointly account for 6.90 million LVs.

That kind of combined number piques the interest of suppliers such as Canada-based Linamar.

“Any change creates an opportunity, so of course we see opportunity in this type of alliance between OEMs,” Linamar CEO Linda Hasenfratz tells WardsAuto in an email.

“We see opportunity as we are a significant supplier to GM but have limited exposure to PSA. A purchasing alliance and sharing of platforms and components should open up more and higher volume opportunities for Linamar to increase content on a larger slice of the global vehicle pie.

“We would further support any move that would financially strengthen a customer,” she adds. “A financially strong customer is a solid, reliable, growing customer, and as a supplier, we would always favor that.”

The last 21 months have seen the establishment of several partnerships with global impact – including the 2010 platform- and powertrain-sharing tie-up between Renault and Daimler and Fiat’s 2009 alliance with Chrysler, a move that rescues the former from bankruptcy.

And Cole promises more. “This general consolidation is going to continue,” he says. “If you look at GM, Ford, Toyota, VW, maybe Honda, they pretty much have global scale. But others don’t.”

Global scale is defined two ways, Cole reminds. Volume is one measure and global presence, of the kind enjoyed by luxury auto makers such as BMW, is the other.

“BMW can have scale at lower volumes than the big guys, but they have common vehicles, pretty much, on a global basis,” he says.

In either case, suppliers bent on competing for higher-volume business on fewer platforms,  as the GM-PSA deal implies, will need to expand.

“If this (trend) continues to go ahead and we’re able to make it successful, as Chrysler and Fiat have done, the message to suppliers is clear: Rethink your global footprint and your global capabilities and make sure that you’re compliant,” Rodgers says.

Chrysler notes Italy-based Adler/Pelzer supplies headliners for the Fiat 500, which is assembled in Poland and Mexico. And to accommodate the latter program, the supplier installed new capacity in Mexico.

The risks of establishing a global footprint are clear, Rodgers adds. “It can also enhance profitability if you’re still doing it the right way, you’re doing engineering in one location but you’re getting the advantage of volumes in two or three locations.”

And there is no going half-way, Cole adds, because expansive supplier networks help generate scale. And to auto makers, scale is everything.

“It’s in parts, platforms, manufacturing equipment, processes, software,” he says. “If you don’t have scale, it’s very hard to compete with those that do.”

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