OEM/Supplier Power Shifts
Over the past couple of decades we have witnessed massive shifts in leverage and power between suppliers and their OEM customers. Understanding and anticipating this movement drives major variances in profitability. Determining who has industry leverage is constantly up for debate, though there is no doubt it is critical to understand one’s position now and in the future.
Industry volume and the dynamics behind it have a substantial impact on where the leverage is found. Through the volume collapse of 2009, the bulk of the last decade was underscored by virtually every OEM expanding to the Brazil, Russia, India, China (BRIC) markets, while at the same time trying to reduce complexity and platform count. Leverage was squarely held by the OEMs, though pockets existed on the other side where a supplier had a quantifiable process or product technology edge. OEMs use the leverage to gain pricing advantages, location, and technology leadership versus competitors. When the first line of cash out the door of every OEM is parts/services procurement, it is paramount that if leverage exists, it is utilized.
The 2009 automotive recession altered the dynamics of industry leverage. As the industry rid itself of unnecessary capacity at both the OEM (vehicle, powertrain and stamping) and supplier levels, those remaining afterwards were more efficient. The new breakeven for North American production reached down to approximately 13-million units according to a regularly conducted Original Equipment Suppliers Associa-tion (oesa.org) survey. At this new level, suppliers which were proactive and restructured were well set up for a run up from 2010 to 2014. Leverage and “power” within the industry shifted squarely in the supplier camp.
New-found profitability was a tasty elixir for suppliers long starved for extended profitability. Capital deployment was still important, but it had become more focused on variable costs as the use of three crews/shifts and overtime occurred. Why build new brick and mortar when extending the current structure with incremental tooling and labor resources would lower risk? After 2009, risk abatement became the new industry mantra. OEMs were seeking additional capacity throughout the supply base—feeding rising demand was more important than working the last couple points of gross margin off a supplier contract. Some less-than-optimal logistics emerged where available capacity and higher component costs with qualified suppliers trumped the need to search far and wide for incremental capacity with new players.
Within North America, those suppliers that survived 2009 were stronger, better financed and were able to diversify to a raft of new OEMs adding capacity in the U.S. Southeast and mid-Mexico. Volkswagen, Toyota, Kia, Honda, BMW, and Mercedes all established capacity or added to existing footprints. For suppliers, the ability to choose optimal future business relationships versus having to settle for programs with lower margins or highly variable volumes was a welcome reality.
Production volumes within North America are slated to grow as OEMs seek to lower currency risk and localize volumes and take advantage of an opportunistic Mexico which has tariff-free access to 45 countries. That being noted, overall production volumes in North America are not expected to grow faster than Southeast Asia, China or even Europe. The shoe is decidedly on the other foot.
Going forward, there are signs that the pendulum could swing for some towards the OEMs for other reasons. Globalization of platforms and the need for OEMs to reduce design and supplier support costs are driving business towards globally capable suppliers, placing pressure on some regional suppliers not willing to extend the enterprise abroad. The importance of reducing logistics costs within a North American production footprint expanding in the U.S. South and mid-Mexico is also challenging suppliers comfortable with their footprints focused on the Great Lakes states, those not willing to add risk through establishing incremental capacity to new regions. Something has to give.
Future power and leverage may only shift to OEMs if one is blind-sided by the market over the next decade. Understanding the new cadence which is faster than before, technology turnover in an environment which has to meet stricter emissions standards and the shift of capacity down south is critical to profitability.
Michael Robinet has been a managing director of IHS Automotive since 2011. Prior to that, he was the director of Global Production Forecasts for IHS Automotive. His areas of expertise include global vehicle production and capacity forecasting, future product program intelligence, platform consolidation and globalization trends, trade flow/sourcing strategies, and OEM footprint/logistics trends.