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Auto Suppliers Cooperate Or Else
Despite the recent outsourcing of orders to China and Mexico by automakers and Tier 1 suppliers, some smaller suppliers can still expect to do well in the coming years. Others can’t expect the same. A handful of factors will decide who makes the cut and who doesn’t, but there is something that could turn the odds for survival in a firm’s favor.
The CEO of the Center for Automotive Research in Ann Arbor feels companies that are able to embrace their competitors are likely to have a better chance of succeeding than those who aren’t capable of doing that.
“Basically, it’s a mixed bag,” said David Cole of the outlook for the state’s automotive suppliers.
Cole said the supplier industry isn’t as profitable now as it needs to be for the long haul and that means some firms will fall by the roadside. But he felt that low-cost suppliers who have the right customers and use the proper technology would do reasonably well.
“There is going to be a continuing shakeout, which means those who are struggling may go over the cliff. We are seeing failures. We are seeing Chapter 11s in different parts of the business,” he said.
But he pointed out that not all suppliers are in such dire straits.
For instance, Cole told the Business Journal last week that he sits on the board of a plastics molder that had more than $1 billion in sales last year and continues to perform well in an area of the business that others have failed in miserably.
“We’re seeing significant stratification even in the same sectors. It’s not like everybody in one sector is in trouble and everybody in another sector is doing well. It’s a mixed bag, and in many respects it depends on the combination of critical issues,” he said.
“If you’re low-cost, if you have contracts with the right customers, if you have high-capacity utilization and strong technology, you’re probably doing pretty well. If you don’t have those things going for you, it’s probably a struggle,” he added.
So what can a small auto parts supplier do to avoid that struggle? Cole said one thing is for a firm to become really good at what it does, because the upper-tier suppliers are trying to lessen the number of smaller suppliers they use.
A few years ago, Cole said, Johnson Controls had over 80 plastic molders supplying parts to it and the company finally admitted it couldn’t efficiently manage that many firms. So the Tier 1 company, with plants in Holland and Grand Rapids, hired a single plastics molder to fill that management role.
Some of the original suppliers to Johnson Controls are still providing parts to the firm, while some aren’t, and Cole feels that the purging process will continue.
“I think that you can expect to see the larger-scale suppliers, as well as the vehicle manufacturers, attempting to reduce the number of suppliers that they have to interface with,” he remarked.
Another thing smaller companies can do is to view competitors in a new light.
Cole said Jay Baron, CAR president and head of the center’s manufacturing crew, has worked with eight tool-and-die companies, including Riviera Tool And Die for more than two years now.
These parts makers agreed to combine their skills in an effort to combat the harshly competitive nature of their business, and in doing so have reduced their operating costs by about 40 percent — a feat Cole said was “astounding.”
The alliance has also made the companies more competitive in a dog-eat-dog business.
“So one of the keys for smaller suppliers is to be able to work collaboratively with other companies that, in many cases, would be historically viewed as competitors. But this is not an easy thing to do,” said Cole.
“What we’re essentially seeing here is the emergence of a different and new business model in terms of how companies operate. Frankly, if a company can learn to work in a more collaborative way, assuming that it has good competency skills and so on, it can be very successful.”