Recently, automotive industry experts have touted the coming "Age of the MegaSupplier." Proponents of the megasupplier theory insist that the increase in supplier merger and acquisition activity, new global sourcing strategies and increased responsibility heaped on suppliers by vehicle manufacturers would lead to the development of huge, monolithic supplier companies. These suppliers would provide complete design, development and delivery of system modules. Some predict the consolidation will lead to only 25 to 30 Tier I suppliers by 2005. It's a myth.
Within this megasupplier theory, huge benefits in economies of scale, cost reduction and corporate streamlining are to be realized in this new age. In theory, this new megasupplier concept is viable and profitable; in practice, the results are somewhat less attractive. The recent corporate woes of Breed Technologies, Harvard Industries and Federal-Mogul can be attributed to large acquisitions that went awry.
Suppliers subscribing to the megasupplier theory are led to believe that vehicle manufacturers will only interact with complete systems suppliers and that all other supplier companies would be relegated to only interacting with these new megasuppliers, instead of the vehicle manufacturers directly. Our research and competitive intelligence suggest this simply isn't true.
The recent flurry of merger and acquisitions by automotive suppliers has limited the available number of qualified suppliers in several systems/component categories. This heightened consolidation activity decreases the vehicle manufacturer's purchasing power and leverage considerably. With the advent of global systems/component sourcing, vehicle manufacturers are seeking seven to eight qualified sources to bid on each contract. The rapid consolidation by several automotive suppliers is thought to be counterproductive by several vehicle manufacturers and is encouraging them to seek out additional "fringe" suppliers to fill the gap.
The potential for backlash against the new megasuppliers is considerable. Vehicle manufacturers are themselves consolidating at a rapid pace due to production over-capacity, inefficient distribution networks and slipping market share. Each vehicle producer is re-engineering its business to maximize profits, improve productivity and explore new customer connectivity via the Internet and alternative distribution channels. Intense price resistance from large suppliers will only lead to increased opportunities for small, non-traditional suppliers.
Automakers Leverage Economies of Scale
A recent trend in the automotive supply industry has vehicle manufacturers maximizing economies of scale in the purchase of raw materials like steel, aluminum, plastics, chemicals, and coatings. One example of this trend is the relationship between the vehicle manufacturers and steel companies.
Under the former supply model, steel producers sold raw steel to metals brokers (“middle-men”) who sold the large quantities of steel to automotive suppliers. After receiving the steel, automotive suppliers manufactured their products and sold them directly to the vehicle manufacturers.
In the new competitive environment, vehicle manufacturers negotiate directly with the steel producers and have long-term supply agreements for these valuable raw materials. Suppliers are allotted quantities of steel from these bulk purchases. In the end, vehicle manufacturers save billions of dollars with the elimination of the metals brokers and the supplier's profit margin on this raw material.
On-Line Bidding & the New
With the advent of electronic on-line bidding for automotive systems and parts contracts, small suppliers have the ability to compete on a global scale with the larger megasupplier conglomerates. Smaller suppliers with less overhead, innovative technologies and dedicated customer satisfaction teams will carve niches with vehicle manufacturers and survive well into the next decade.
Through on-line bidding, vehicle manufacturers will realize billions of dollars in cost-savings and establish a less-labor intensive purchasing bureaucracy. Cost-savings will be gained through the decreased number of purchasing agents and electronic delivery/receiving of bid packages.
In the future, on-line bidding portals will become profit centers for vehicle manufacturers as suppliers can buy and sell raw materials, used presses, dies and other equipment through these new on-line marketplaces. Of course, the vehicle manufacturer will take a percentage of the sale (a la eBay) as a fee for bringing the buyer and seller together via its convenient portal.
2010: Autonomous, Connected Suppliers
As we analyze the current competitive environment and project future vehicle manufacturer/supplier trends, one fact is clear: the basic structure of the automotive supplier industry is shifting toward a new model. The old Tier I, II, III model is already obsolete and a new structure is taking shape: the Autonomous/Connected Supplier model.
By 2010, each supplier organization will be autonomous and interact with vehicle manufacturers and other suppliers electronically. Long gone will be the keiretsu, chaebol and preferred-supplier structures, having been made extinct by the massive vehicle manufacturer consolidation. Each supplier organization will have electronic production tracking and delivery schedules available to its customers via the Internet. Raw material flow, sequence/assembly and delivery logistics will be controlled and monitored electronically. Flexible design configuration archives, product specification parameters and system/component designs will be available for viewing by potential customers via electronic interface.
In the future, competition will be as fierce as ever, but a new, efficient structure will provide massive cost savings for vehicle manufacturers and suppliers alike.