OEMs and suppliers of all tiers are having trouble grappling with ever-increasing production volumes in North America. On the whole, the supply chain is pushed to the edge in North America on several levels while producers in other regions—China, India and Brazil—are taking a modest breather from the frantic growth rate. Yet those in Western Europe are starting to come to grips with decades of blind neglect from the basics of any industry: supply must reach equilibrium with demand at some point.
In the midst of the heavy decline and restructuring of the North American industry in 2009, the seeds of rebound were already sewn at General Motors, Ford and Fiat’s new acquisition, Chrysler. A major aspect of the rebound was to be a surge in global structures offered by the Detroit 3. Global platforms offer several advantages for OEMs, suppliers and customers. Enhanced economies of scale, inter-region production flexibility, lower tooling and development costs, and supplier consolidation through component/system commonization are all major advantages. This transformation of the production framework has been outlined before, though there is an eventual victim as this story plays out—the regional supplier.
Before we outline the trials and tribulations of today’s regional supplier, it is important to define exactly what one is. Today’s regional supplier needs to transcend two major issues which are counter to the shift toward global platforms: Multi-region production capability and multi-region design/development support. This is not to say that the former is more important than the latter—it depends on where one is in the vehicle, which OEM they are supplying, and the technology/logistics characteristics of the component/system. Many suppliers with production capability in one region will survive in today’s evolving globally integrated production environment through multi-region design, engineering and development support. That is a growing staple of a successful supplier of any stripe. Economies of scale, lowest cost location and the reduced relative importance of logistics of components which ship efficiently is an enabler. The lack of global design capability is more critical for the future.
The ability to impact design of components and systems early in the process is key to margin enhancement and preservation. Working with OEM engineers and designers to “integrate” your components or process into the specifications for a new vehicle or engine design is paramount to gaining the edge on the competition—well before the RFQ is sent to the broader supply base. Strong regional suppliers are being eliminated from consideration despite flawless quality, delivery and even cost structures. In the end, OEMs are seeking the lowest possible landed cost—especially when logistics are concerned.
Last decade, the surge toward global suppliers started in earnest. The ability to gain business in growth regions of China, Brazil and Eastern Europe demanded that many companies required a local production presence. This was achieved through several means—royalty arrangements, licensing, joint ventures, and wholly owned subsidiaries. Each structure drives a certain level of risk and control which a supplier has to grapple with. To skirt the need to expend capital and resources to truly foreign environments, many decided to “act global” through non-equity affiliations. OEMs globally accepted these arrangements given that the core supplier had a hand in ensuring delivery, quality and performance of the globally sourced component—all seemed well. Along came the 2009 auto downturn which brought several suppliers to the edge. Without the means to aid those linked through affiliations, several OEMs were left to seek new sources as many of these loose linkages began to unravel. Going forward, stronger linkages through equity participation would be a growing requirement by global OEMs—seeking the need to truly deal with one entity from a design, delivery and production perspective.
As noted, several suppliers will still skirt the need to build in several regions due to considerations of capital and economies of scale. This will not reduce the need to support the development of their components and systems into platforms designed outside their home region. In North America alone, the share of vehicle development for vehicles built in the region will decline. Translation: You had better establish a robust global design and development capability close to the core design centers in Germany, Japan, China, and Korea if you want to continue to be a long-term, leading-edge supplier. In this case, “location, location, location” refers to working closely with the core design centers to ensure your firm’s capability is first in the minds of the OEMs.
The pressure on regionally focused suppliers will intensify over the balance of this decade. OEMs are determined to work with fewer suppliers as they cite overhead efficiency, better technology partnering, and in the end, lower cost as a driver toward fewer overall suppliers. As strong volumes in North America are masking the deficiencies of many regional suppliers, the blemishes will begin to appear as new global suppliers emerge and capacities rise.