Tier 1 suppliers to the North American automotive industry are facing tough challenges in 2008 — spiking raw material costs, auto production cuts and a weakened economy. Auto manufacturers face similar hardships.

"The challenges of rampant increases in material costs, poor economic conditions and increasingly intensive competition require that each OEM [original equipment manufacturer] works more closely than ever with its suppliers to maximize its chances for success," says John W. Henke, Jr., president and CEO of Planning Perspectives.

Planning Perspectives recently published its Working Relations Study (via MarketWatch), which ranks the six major domestic and foreign North American OEMs — General Motors, Ford Motor Company, DaimlerChrysler, Toyota, Honda and Nissan — on 17 areas that impact their supplier relations.

According to the study, the four critical areas that directly impact a supplier's financial viability (i.e. survival) are: OEM concern for supplier profit margins, supplier's perceived ability to make a fair profit, OEM fairness in allocating charge-backs and supplier ability to recover material costs.

"Now is not the time to take an adversarial approach to working with suppliers," Henke advises. "Every automaker should be striving to work in a more trusting way with its suppliers so that it can take full advantage of the benefits they offer and strengthen its marketplace advantage. Suppliers simply respond in kind and Chrysler is paying the price."

Chrysler suppliers have pulled back from sharing new technology with the automaker because of worsening relations with Chrysler.

The respondents comprise 284 Tier 1 suppliers, 71 of which are among the top 150 North American suppliers. According to the study, Ford is now the most preferred domestic automaker and Chrysler has fallen to last place. Honda and Toyota take the top spots. The rankings are as follows:

1. Toyota (367 points out of 500)
2. Honda (359 points)
3. Nissan (253 points)
4. Ford (191 points)
5. GM (163 points)
6. Chrysler (161 points)

The rankings are not merely a popularity contest for OEMs, Henke says. Poor supplier relations can have long-term adverse impacts for an industry already plagued with bad news such as rising costs.

North American auto manufacturers face as much as $13 billion in additional raw material costs this year, according a new study by AlixPartners LLP, a suburban Detroit turnaround specialist and business advisory firm. Cuts to vehicle production, keeping in line with the 14 million U.S. light-vehicle sales forecast, will create even more problems for suppliers, Automotive News says.

GM's restructuring announcement in July, along with production reductions and other efforts to cut costs, will put even more pressure on Tier 1 suppliers to restructure, Automotive News adds.

"This is not only GM; this will be the industry standard for a while," Ilhan Geckil, senior consultant and economist with Anderson Economic Group, tells Automotive News. "The industry needs to change and this is not going to happen overnight, but this whole [restructuring] plan is making this shift as easy as possible."

Updating its seven-year analysis of 31 of the largest publicly traded global Tier 1 automotive suppliers, a 2006 report from Accenture found that suppliers who led in revenues and profitability closely aligned their competitive strategies and business models with the value of their products. According to the research, high-performers succeed by focusing on low-cost production as a strategy, on technology leadership and customer relations as a strategy and on establishing operating companies dedicated to both commoditized and highly engineered portfolios as a strategy.

Whether focusing on these approaches as a survival strategy will still work in today's challenging automotive environment remains to be seen. Yet suppliers must be able to adapt their business models accordingly.

Richard Spitzer, global managing partner of Accenture's automotive practice, advises suppliers: "With the right competitive strategy and business model, suppliers can position themselves to expand product markets and grow content per vehicle, and thus maintain revenue growth."

Resources

Annual Supplier Rankings of Automakers by Suppliers Show Toyota and Nissan Slipping, Ford Gaining and Chrysler Tanking
MarketWatch, Aug. 11, 2008

North American Automakers and Suppliers Face Up to $13 billion in Raw-Materials Risk in 2008
AlixPartners LLP, May 22, 2008

GM News Creates More Problems for U.S. Suppliers
by Ryan Beene
Automotive News, July 15, 2008

Accenture Research Reveals New Supplier Business Models
Accenture, 2006