The Auto-Parts Crystal Ball: The Future Doesn't Look Pretty

Over on Supply Excellence, Tim Minahan has done a great job covering the automotive industry of late. There's no sense in repeating what he's said already on these pages. But I will take a minute to point out an article that caught my attention in a Wall Street Journal from earlier in the month. In it, The Journal shows the dire situation that many North American automotive companies are in. Consider that "while the struggles of Detroit's Big Three auto makers make headlines, U.S. auto-parts makers have slashed more than four times as many manufacturing jobs as the big auto makers during the past six years, and the shakeout appears likely to accelerate."

According to the piece, "many small U.S. suppliers are succumbing to higher raw-materials prices and pressure from lower-cost competitors. Now, tightening credit markets are drying up the easy money that allowed suppliers to delay or fund slow restructurings, say supplier and auto-maker purchasing executives. If U.S. vehicle demand doesn't pick up from the sluggish pace of the past three months, more parts makers could start to skid."

News like this should be a wake-up call for the OEMs and tier ones to invest in supply risk management processes and technology. In fact, if I were running procurement for a large automotive provider, I'd create the job of supply risk tsar. Need further proof why? Listen to the words of Bo Andersson, GM's head of global purchasing, who is quoted in the article: "This last year we've really been seeing our smaller suppliers -- that is, those who have annual sales of $250 million or lower -- start to struggle or go under, mostly because they've been hit by the rise in raw materials like plastic or steel ... We'd like to keep those small suppliers because they have something we don't have at GM: an entrepreneurial edge. So we will try to help them keep going."

In the rest of the article, other experts are cited as noting that the credit crunch will "increase the likelihood that some suppliers will be unable to restructure due to their inability to raise some additional financing or refinance their existing debt ... if they can't fund the turnaround, they may run out of liquidity." But despite the foreboding debt environment, there's still a major role for the domestic parts supplier. In this regard, The Journal notes that it does not make sense for automakers to buy everything overseas because of freight and logistics costs. To this, I'd also add that local suppliers are far better equipped to meet the lean and JIT manufacturing environments that characterize leading automotive assembly practices today.

Jason Busch

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