The relationship between automotive suppliers and vehicle manufacturers has long been a difficult one, ranging from willing collaboration to reluctant co-operation.
OEMs have for many years done everything they could to cut purchasing costs. Suppliers have complained for just as long about the OEMs beating them down on price.
Recent statements by Daimler and Volkswagen about the need to cut costs worth several billions triggered alarms across the supplier community; billion-shaped cost cutting is a cause for concern whether in euros or in dollars. In its truest sense, cost cutting involves a genuine effort to eradicate unnecessary expenditure across the business, benefiting everyone; in reality, it results in buyers slashing purchasing budgets, effectively pushing the “savings” onto their suppliers.
According to John Henke’s Planning Perspectives study, the better the relations between OEM and supplier, the better the chances of that OEM improving profitability
Vehicle manufacturers build cars with the components and systems they buy from their suppliers – components and systems they cannot make in-house. Tier 1s have worked hard to position themselves as more than mere commodity suppliers, effectively becoming service providers to a vehicle manufacturing industry that increasingly relies on suppliers for R&D and innovation. The OEMs are the suppliers’ customers; and the suppliers only exist because of the OEMs. Everyone relies on each other – and they’re all under pressure to protect the bottom line and turn a profit.
Comments made by Sergio Marchionne last week underlined (revived?) the difficult relationship between the OEM and supplier communities, and inspired an important debate – although it’s questionable whether that debate is the one that was intended.
Speaking publicly, the Fiat and Chrysler Chief Executive expressed his envy at the double digit profits currently being enjoyed by some of the major Tier 1 suppliers, whilst OEMs struggle to get their profits into the high (or even the mid) single digits. Perhaps, he suggested, OEMs could “constructively participate in” some of the supplier base’s new-found wealth.
Waiting in the wings is a growing number of outsiders keen to play the automotive game. Free of traditional automotive industry heritage, these are companies that deal harder than the known automotive industry entities
In an already fractious environment, strong relationships and a high level of trust are essential. According to John Henke’s Planning Perspectives study, the better the relations between OEM and supplier, the better the chances of that OEM improving profitability. But profitability and market share are rarely compatible, so it’s down to the OEM to decide where to focus. No sales team wants to sell low; no buyer wants to pay high; and they are all under pressure to sell higher or pay lower. But Henke goes further: the better the relations between OEM and supplier, he says, the better the chances are of that supplier agreeing to price concessions. But an OEM thinking about paying less is different to an OEM expressing that desire out loud.
The OEM-supplier debate will continue ad nauseam; meanwhile, waiting in the wings is a growing number of outsiders keen to play the automotive game. Free of traditional automotive industry heritage, these are companies that deal harder than the known automotive industry entities. They have no qualms about reinventing mobility; they’ll work peer to peer, develop a car with no driver controls and build it outside the mainstream. They know how to market it, distribute it and sell it – and there won’t be an OEM in sight. Perhaps that’s what the debate should focus on.
Martin Kahl is Editor, Automotive World.
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