Hot Week for a Cool Industry

To say that Traverse City, MI, had a warm spell the week of Aug. 6 is like saying that a few people were excited that Bob Lutz had come out of retirement to give General Motors Corp. a product development shot in the arm.

It was so hot — tickling 100°F — that “heat advisories” were announced with great panic on local radio, and residents were advised to stay indoors. Just the sort of thing that a resort town must love to hear.

It was so hot that attendees at the automotive Management Briefing Seminars at Grand Traverse Resort were punished by the elements if they skipped a session to spend the afternoon golfing instead.

It was too hot to socialize in the early evening hours under the big yellow tent. Only the poor shrimp were staying cool.

Ironic, considering that the auto industry's heavyweights convened for the annual Traverse City conference under economic conditions that were considerably cooler than they were a year earlier.

With the Big Three automakers cracking the whip on suppliers for price cuts, the frustration was boiling over for a number of conference participants.

At one session, a panel of supplier experts was asked if pricing pressure affects product quality and whether, in some cases, suppliers intentionally sacrifice quality as a result.

“Anyone who trades quality for cost is doing the wrong thing,” says Joseph Day, chairman of Freudenberg-NOK. “Quality is a given. To the extent he thinks he can get more in line by trimming quality, that's hurting the industry. I believe the industry is not doing that … and I just can't believe those claims are accurate.”

Richard Hervey, president of Sigma Associates and a long-time supplier consultant, begged to differ.

“They are accurate, from what I've seen,” Mr. Hervey says. “I've interviewed suppliers about this. I don't think anyone consciously cuts quality, but sometimes we do things that aren't the best thing for us.”

Panelist Neil DeKoker offered up evidence that quality remains a problem. He says U.S. automakers record an average $600 in warranty claims per vehicle, compared to $400 for Japanese vehicles. Toyota Motor Corp., he says, records claims of about $75 per vehicle.

As the managing director of the Original Equipment Suppliers Assn., Mr. DeKoker was asked if he sees the Big Three getting better or worse in their supplier purchasing relationships.

He says Toyota and Honda Motor Co. Ltd. remain the model. DaimlerChrysler's 15% price cut and Ford Motor Co.'s 50% increase in price reductions over three years has left suppliers bitter. Mr. DeKoker says GM, under Bo Andersson in Worldwide Purchasing, has replaced the former Chrysler Corp. as the carrier of the “extended enterprise” torch.

What's a supplier to do? Slim down rather than bulk up, Mr. DeKoker suggests. “Shut down excess capacity rather than filling it with low-margin business or buying market share,” he says.

Suppliers have learned from automakers that volume equals success, but it's not true today, he says.

Later in the week, ArvinMeritor Industries Inc. Chairman Larry Yost says the U.S. auto industry could go the way of the railroad industry without a new business model.

Compared to other sectors, like telecommunications and technology, automotive is the least appealing for investors due to its slow growth and low returns, Mr. Yost says. While market capitalization in the automotive sector declined by 34% over the past three years, there was a 121% increase in telecommunications and a 236% increase in technology.

Mr. Yost sees collaboration as the answer to the industry's woes as “no one group in the automotive sector can change this alone, (and) solutions won't work for one supplier or OE at the expense of the other.” He lauded Tom Stallkamp of MSX International, who promotes vertical alliances.

But supplier alliances must be approached with great care, Mr. Stallkamp says in a panel discussion. When management changes at one of the companies involved, the entire deal can be scuttled.

“You throw everything out and start all over again. We've seen that from OEMs on down, and I just think that's terribly disruptive,” Mr. Stallkamp says. “You're only going to get there if you have a senior management that understands there's life beyond their own short time on this earth. And there's not a whole lot of senior management that do that, frankly.”

After enthusiastic applause, conference moderator Dave Cole says, “Tom, I think that probably will get in the newspaper somewhere.”

To which Stallkamp shrugs: “This is the largest industry on the planet with the thinnest skin.”

For complete Traverse City coverage, see www.WardsAutoWorld.com.