Software Keiretsu?High costs could create system-driven serfdoms

The emergence of less expensive computers and software allows automakers and suppliers to share information and integrate operations in ways never before possible.

The capability is emerging for suppliers to receive orders for production on a near real-time basis from their customers and pass their orders for parts on down the supply chain. It's conceivable that orders that used to take weeks or even months to filter down to the materials supplier could be transmitted in a matter of days.

In addition, a growing number of suppliers have the ability to design parts on computer aided design (CAD) systems that they can share with their automotive customers. As the systems grow more sophisticated, multiple supplier and automotive engineers could work on the same mathematical model of a car and see changes almost as they're made.

The combination of electronic communication and mathematical cooperation is heralded as a revolution that will change the way the industry runs and allow ever-faster vehicle development and production.

That's the good news.

But all these high-tech gadgets don't come cheaply. And while industry initiatives like the Automotive Network eXchange (ANX) attempt to standardize electronic communication, it's still not a single, unified computing world.

Each major automaker in North America has its own CAD system. Ford Motor Co. is developing along the C3P model with SDRC. DaimlerChrysler Corp. uses CATIA, and General Motors Corp. runs on Unigraphics.

While the large suppliers have the budgets to hire pools of engineers to specialize in each system, it can be a tall order for smaller players. Just to outfit a work station in one of the CAD systems can run about $20,000 - and with training and maintenance costs some estimates peg the true cost at closer to $90,000 per seat.

The Danas and Federal-Moguls of the world may not blink at that kind of cash, but lower-tier suppliers are increasingly hard-pressed to keep up with multiple work stations for multiple customers.

Which leads Neil DeKoker, head of the new Original Equipment Suppliers Assn., to suggest that the demands of information technology may lead to a loosely captive software-based keiretsu.

He says he posed some smaller suppliers' concerns to engineering executives from DC, Ford and GM at a recent automotive event. Mr. DeKoker says he asked the Information Technology (IT) leaders if they would consider agreeing on a common CAD standard for the supplier community.

Their answer? A decided "No," he says. Each automaker considers its CAD system part of the competitive advantage and expects its suppliers to adapt.

"I asked 'How can they afford to meet all the engineering and CAD requirements?' and I was told they may have to make a choice," he says.

Which means IT demands might push smaller suppliers in a decidedly unattractive direction toward more reliance on one automaker. The trend has been to diversify, if possible, and the GM strike in 1998 clearly hurt suppliers who were less diversified away from GM.

A supplier could decide to cast its lot with one automaker and that could mean a closer working relationship and more integrated supply chain.

The alternative would be for the supplier to either hook up with other suppliers in similar straits with different automakers or accept the inevitable and sell to someone who has the resources to stay in the game.

Responses to the 1999 WAW engineering survey suggest the trend is real: 58.8% of supplier engineers responding to the survey say it's somewhat difficult to keep up with software requirements, and 11.5% say the demands are extremely difficult. Nearly half say they've had to change their primary software programs in the last year.

But a majority of the supplier engineers (42%) still say their companies haven't suffered "measureable financial hardship" keeping up, compared to 21.7% who say their company has suffered. Another 32.7% weren't sure.

Don Peterson Sr., a production engineer at Harvard Industries' Hayes Albion Div., and Rich Marks, engineering manager at Hutchinson FTS product engineering, are among engineers who say demands are causing hardships.

Mr. Marks says not only are software demands causing problems, but "it is getting worse, not better. The big OEMs don't care."

Mr. Peterson says it has been extremely difficult to keep up with the demands, and his company had to add programs to stay in the race.

It's clearly a growing factor in the supplier industry shakeout. Suppliers already point to the need to globalize and the increased engineering requirements as fueling the merger binge Soon they'll likely be adding the toll of the information age to the basket as well.

But when it comes to information technology, there appears to be plenty of pain to go around. OEM engineers surveyed report that they, too, are under the gun when it comes to keeping up with software developments. Nearly 22% say they still haven't standardized their software, and like suppliers, most OEM engineers say keeping up with software requirements is somewhat (58.9%) or extremely (14.5%) difficult.More than 40% report they have had to change software programs being used in the past year.

Like suppliers, a hefty number of OEM engineers (24.2%) say they believe their companies have suffered financial hardship in trying to keep up with software requirements. O