Auto Suppliers Feel Pressure

May 6, 2005
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GRAND RAPIDS — If anything is certain in the automotive industry, it’s that times are going to get worse before they get better. Suppliers can count on pressure from both sides — OEMs are going to keep competing on price and costs are going to keep going up.

Meanwhile, the market share of domestic automakers will continue to erode from foreign competition, while suppliers are displaced by low-cost alternatives in Mexico and China.

“Entrepreneurs are optimistic. They think they can beat everyone and take on anything,” said Van Conway, founder of Conway MacKenzie & Dunleavy. “On the other hand, if you’re in a storm, you need to know you’re in a storm.”

Conway was one of four keynote speakers at the Seventh Annual Automotive Suppliers Symposium last month in Grand Rapids. His firm is nationally recognized as an adviser to under-performing businesses and has been engaged as a turnaround consultant to a multitude of industries.

“You want to avoid becoming a client of my firm,” Conway said. “Underperforming is a nice way of saying it. Companies come to us when they are in a crisis mode.”

Crisis mode could accurately define the automotive industry. Volumes are flat and should remain relatively so for a number of years.

Still holding 70 percent of the market as late as 1999, domestic automakers have since lost 10 percent of the market to foreign brands. Conway recalled a visit to a company a decade ago where an employee of his was warned against parking his foreign car at the plant because something bad might happen to it.

“There isn’t any patriotism anymore,” he said. “If people like a car and the price is right, they buy it.”

Meanwhile, inventories are high and the cost of doing business has skyrocketed — steel alone has doubled in price.

As a whole, suppliers’ customers are struggling. Delphi, Visteon and GM are all flirting with bankruptcy.

“Most companies fail because they don’t recognize they are in a crisis,” Conway said. “You don’t want to think like you’re in a crisis 24-7 or you’ll look for a tall building to jump from — although I know there aren’t too many in Grand Rapids.

“In the short term, there will be more pain and suffering; (OEMs) are going to go supply side for cost savings. If your customers are losing money, you can expect to give up something you don’t want to give.”

Jeffrey Engel, executive director of Ford Motor Co. Americas Product Purchasing Operations, did little to alleviate the price concerns of the roughly 100 suppliers gathered during a 40-minute Q&A session.

“The consumer isn’t going to pay another dollar no matter what the content,” Engel said. “We need to work with costs. The consumer isn’t going to let up on cost pressure.”

Conway suggested that cost reduction won’t solve automakers’ problems.

“If you lose your customer base, you’re in trouble,” Conway said. “Cost reduction only saves time.”

Some suppliers had questions for Engel about Ford’s growth plans. Even as some complained that they could no longer afford to locate plants domestically, others expressed interest in locating plants overseas.

Engel said that Ford was seeking growth opportunities in China, but for obvious reasons would be careful about announcing its facility locations.

Another supplier asked if there would be opportunity for export to the Chinese market.

“We’d like to expand with our core set of suppliers,” Engel said. “I don’t want to go to China to invest in a new supplier. I’d rather invest with some of the people in this room. We are dealing with local (Chinese) suppliers for that market and there is some opportunity for export of those parts to the U.S. But at this time we don’t see opportunity for the export of U.S. parts to China.”

Craig Fitzgerald, director of Plante & Moran’s Automotive Supplier Strategy Services, and Gary Gjertzon, director of supply chain management for Fuel Systems LLC, both shared turnaround case studies.

The common factor in each was a transformation to an innovative and agile company that concentrated on core competencies and competed on price and service for a niche customer base.

In Fitzgerald’s unnamed example, the company chose to only bid on projects that it could deliver for at least 20 percent savings over the incumbent provider. Fuel Systems, by contrast, whittled its own customer base from 50 to 12, weeding out the unprofitable alliances.    

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