SRX

When push comes to shove, it’s innovation that suffers, says a new study.
by Joseph Szczesny (2004-05-24)

The decision of Timken, a key supplier to domestic carmakers for decades, to close a plant in Canton, Ohio, underscores the pressures on automotive suppliers even as demand for new vehicles improves.

Production at the company's bearing plants in Canton, Ohio, has declined 27 percent over the past five years as the cost structure of the operations made it difficult to win new business. The plan to close the Canton bearing operations is consistent with Timken's overall strategy to make the company more profitable, more customer-centric, and better able to grow, Timken noted in a statement earlier this month.
Historically, though, the plant, which employs 1300 workers, has been the foundation of the company, which is based in Canton and was been visited by President George W. Bush as he campaigned through Ohio.

Timken has blamed the United Steel Workers for the shutdown - but the union is having none of it. It has laid the blame squarely on Timken's management and its desire to find less expensive labor outside the U.S.
Precarious position

A new study by a leading consulting firm, however, warns the heavy pressure to reduce costs in the auto industry has left both carmakers and suppliers in a precarious position.

The consolidations among suppliers driven by aggressive demands from vehicle manufacturers for cost reductions also threatens to undermine the industry's overall competitiveness and slow innovation, according to a new study by the Boston Consulting Group. The study predicted that half the 1500 suppliers supporting automakers now could disappear by the end of the decade as the consolidation continues.

The Boston Consulting Group's analysis suggests that more than 60 percent of the automotive industry's value is now created by suppliers.
Suppliers now register more than three times as many patents as vehicle makers in part because automakers have left suppliers with more responsibility for research and development, the study noted.

Meanwhile, automakers have steadily reduced spending on basic research and increasingly use grants to universities to pay for research on a variety of subjects. Over the past decade, the big automotive companies have outsourced central functions, which has left them dependent on ever fewer suppliers and their innovations, the study noted.

At the same time, however, conditions for innovation in the industry have worsened for suppliers. The demands for price reductions have continued to escalate, the study found. Suppliers have been forced to reduce their prices by three percent annually for the past ten years, the study noted. Meanwhile, automakers are busy looking for additional reductions in prices. James Padilla, Ford Motor Co.'s new chief operating officer, said he does not anticipate any let-up in the effort to reduce costs.
The average supplier has seen its profitability slashed almost in half, the Boston Consulting Group noted.

Diversity rules

In their own interest, OEMs should see to it that their supplier base remains diverse, said BCG vice president Frank Dietz. That is the only way they will be able to cover the entire range of vital innovations. The Boston Consulting Group also pins the industry's current quality problems to the tense situation with suppliers. In the last decade, the number of product recalls doubled. In 2002, nine of the ten biggest recalls were a result of difficulties on the supplier side, the study noted. It doesn't take long for supplier problems resulting from cost pressure to hurt the OEM brands; conversely, cooperative dealings with suppliers pay off, noted Andreas Maurer, a BCG vice president. If automakers want to stay competitive, they will have to stop focusing their purchasing strategies primarily on cost and put more emphasis on differentiation with new technologies, added Maurer, one of the reports authors.

The BCG study team also found automakers with good supplier relations enjoy higher customer satisfaction than do those with poor supplier relations. Automakers, particularly GM, Ford, and Chrysler, have insisted the pressure on suppliers is a response to consumer demand for better products at lower prices.

The BCG also said the market-driven purchasing policies of GM, Ford, and Volkswagen appear to yield smaller results. The more collaborative approach used at Toyota and BMW appears to be more effective, the study added.

Suppliers are prepared to invest in new technologies only if they can be assured that their innovation will be appropriately compensated and research and development costs can be recovered.

Suppliers also should look outside the industry for new ideas and make more effective use of the Internet, the Boston Consulting Group reported suggested.