Now It Gets Harder
A market of haves and have-nots is emerging. As noted in prior columns, part suppliers have had a tremendous run since 2009–seven straight years of annual volume increases. To this point, virtually all participants grew both the top and bottom lines in this market expansion. One could tolerate less than stellar returns in Western Europe or a money-losing facility in Brazil if operations in North America and China pulled the load. As the North American light vehicle production market begins to plateau, those that prepared for tougher times will benefit.
Suppliers active in the growth sectors of powertrain, lightweighting and electronics are starting to find that while the competition is rising and demands of faster vehicle/powertrain cadence are stressing their organizations, there is some shelter from margin pressures as these areas gain importance to OEMs. In an era where powertrain emissions compliance, lower CO2 driven by less mass and safety/consumer-led electronic content has gained importance, those in other sectors will be fighting for attention. As vehicle cost escalates with required expenditures for compliance, OEMs will be seeking to reduce expenses in other areas of the vehicle. While innovation will be critical to differentiating one’s value equation, several sectors will be under pressure for reductions. Steering, suspension, traditional powertrain, interior and other non-critical areas will be under constant pressure to reduce cost.
Pressure for cost reductions will take several forms in the future. OEMs adding new entrants to their supply base (possibly from China, India or Europe) will serve to leverage existing players for more competitive pricing. Greater control of tooling procurement, directed content, material resale, engineering change management and mandated pricing (productivity) reductions will further deteriorate margins. Add in the potential for less stable volumes, and suppliers are now entering new territories not seen since the last decade.
How does one combat the constant pressure for cost reduction in the face of a myriad of negative factors? Several OEMs are protecting margin through vertical integration. Having expanded control of the value-add for a system enables for more options to reduce cost. Those only conducting one value-add operation to a component/system have few options when price reductions are looming. Enhanced control of the BOM (bill of materials) allows for more options. Others are seeking alliances to shore up areas within their capability set which may be lacking. Many in the industry are finding that organic growth can take too long and actually exhibits higher risk versus an alliance for or acquisition of a capability. In this era of tighter labor markets, especially in skilled and technical positions, building incremental capability through an organic process may not be possible.
Logistics cost minimization and minority supplier content enhancement are other methods suppliers are using to gain/maintain business in a competitive market. Virtually every OEM is seeking to minimize transportation costs, risk and dunnage by shortening the distance for final components to travel to the vehicle or powertrain assembly facility. Minority supplier content is proving to be a significant positive for those in position to offer this benefit. Last year, 27 percent of personal-use vehicles purchased in the U.S. were by ethnic consumers. Combined with female buyers, these consumer groups are growing faster than all others. OEMs have to pay attention to this.
The pressure for reduced total cost will be relentless over the next 10 years as OEMs allocate more resources toward shared mobility, regulatory compliance and autonomous driving. Costs will not be able to climb unabated as in the end the consumers’ ability to afford new vehicles will be the final arbiter.