Why OEM-Supplier Relationships Need to Evolve

In a world where everything from how we watch movies to how we get a ride home has been turned on its head, it appears there’s one thing that hasn’t changed much: the relationship between OEMs and suppliers.

That’s a red flag. Or, at least, it should be.

The news that came from this June’s release of the North American Automotive OEM-Supplier Working Relations Index (WRI) report doesn’t, at first, look much like news. None of the working relations between suppliers and the six largest U.S. automakers showed a statistically significant difference either up or down compared to last year.

But with the dramatic rise in electric and autonomous vehicles, doing it the way it has always been done isn’t going to cut it anymore. Here’s why:

The technology is more expensive – and more desirable

OEMs have a long history of putting pressure on suppliers, even those with whom they purport to have a good relationship, to reduce costs.

That might work when OEMs are simply shopping for commodities. But what happens with technology in a car such as the Tesla Model 3, which has reconsidered and reimagined so many of the parts once considered standard components?

Tesla and the Model 3 may be outliers today. But they provide a vision of the near future, where the most growth, change and potential differentiation exists in software and emerging tech.

While many OEMs in the U.S. are being dragged reluctantly into the electric-vehicle market, sales of EVs more than doubled in six major countries last year (including the U.S.). Globally, EV sales grew 75% in 2018. And by 2040, some estimate the EV market will sell over 60 million units annually; that would account for 70% of today’s car sales.

And when it comes to autonomous vehicles? We already know the market potential is huge, possibly to the tune of over $500 billion globally in a decade, leaving aside the abundance of driver-assistance technology already available in models today.

This tech is what consumers want, and that’s no secret, but implementing the level of tech sophistication needed to support this vision of the future isn’t cheap.

It’s important, not to mention necessary, that every OEM now has a significant presence in Silicon Valley. What’s not yet clear is whether each thinks they can import a Detroit mindset out West and assume things will always be the same.

Suppliers are really important

Because OEMs control the final vehicles produced, many continue to use that role as a hammer for negotiating leverage with their suppliers.

All this attitude does is cause the supplier to provide higher price estimates upfront, looking for some sort of protection for when the pressure to do it cheaper and faster inevitably comes down from above. Or they take significant pricing risk, counting on major engineering changes and recovery down the line.

Or, even worse for many OEMs, those same suppliers take their tech to those who will provide the best working relationship. Rather than leaving room for suppliers to bring their big ideas, which could be cost-saving or best-in-class, many OEMs may completely miss out.

A focus on technology and innovation is the only way automakers will achieve their vision of the future – one filled with new types of vehicles and technologies, but also with new competition. And with emerging technology will come new suppliers who have never swum in these waters before.

Navigating supplier relationships already is hard, and that complexity will only increase. But the opportunity is there now for OEMs to recognize suppliers’ value, create a firm foundation and take steps toward improving relationships in a meaningful, profitable way.

Separating the wheat from the chaff

The results of the WRI report make something else very clear: As the industry continues to transform, the best suppliers will begin to gravitate toward the OEMs they feel they can trust the most.

This means characteristics such as being flexible on cost, working closely together on engineering changes and avoiding conflicting objectives or even outright intellectual-property theft.

Although no major automotive manufacturer showed statistically significant improvement in the WRI last year, it’s becoming clear that suppliers are starting to favor some OEMs over others.

Toyota and Honda consistently rank ahead in terms of trust, communication and overall preferability as a customer.

Daron Gifford (2) (002)

Suppliers always have played a critical role in determining which OEMs come out on top. Now that role looks even more critical – a reality reflected everywhere except in the numbers meant to measure it.

Daron Gifford leads Plante Moran’s automotive industry consulting services.