European suppliers--under the microscope and under the knife.

Relations between automakers in Europe and their suppliers are prey to the same stress points felt by their North American counterparts. Evidence of this state of affairs can be found in the recent report The Price Reduction Requests of Selected European Automobile Manufacturers by Hans-Andreas Fein & Associates and IRN Inc., published in April 2005. The results of this latest supplier survey document the increasing costs placed on suppliers and their corresponding levels of frustration. One supplier to GM-Opel commented in its survey response, "They do not allow arguments! It is just blackmail--American way of business." This is a bit unfair, particularly considering the role that a Spaniard, GM's former purchasing chief J. Ignacio Lopez, played in spurring intense competition between suppliers in the early 1990s. Overall, the 196 survey responses collected in 2004 generally reflect a recognition that the conditions in the European market are driving automakers to similar conclusions as their North American colleagues about what help should be expected from the supply base.

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The chart below gives a snapshot of the situation. European light vehicle registrations for the major automakers in Germany and France have not been enjoying much, if any, growth over the last few years. Consequently, the OEMs have been attempting to reduce costs to improve their bottom lines. The survey shows that whether a supplier provides a commodity part, a system, or even a patented component, customers are making repeated requests of their suppliers within a single year for concessions in the prices of purchased parts. The average percentages for the concessions requested by each automaker appear in the boxes on the chart.

Ford has been the most aggressive in this regard, with an average request of 6.1%. This is up from its average request of 5.2% in the prior survey conducted two years ago, when it was also at the top of the list of supplicants. In the previous survey, Opel was next in line with an average request of 4.7%, but the respondents this time reported lower requests from Opel, resulting in an average of 4.0%. Volkswagen and DaimlerChrysler moved in the opposite direction from Opel, becoming more rigorous in their requests. In the 2002 data, VW made requests that averaged 3.2%, but in 2004 that had risen to 4.1%. (This could also be a reflection of the decision to split out the Audi Div. and report it separately in the 2004 survey, per suppliers' suggestions.) DaimlerChrysler was at 3.7% previously, but exceeded VW to hit 4.2% this time, the second-highest request level in the 2004 results. The European survey was expanded in this round to include the French OEMs, PSA Group (Peugeot and Citroen) and Renault. These volume producers are still at the low end in their requests of suppliers, 3.2% and 3.0% on average, respectively.

One of the goals of the survey is to investigate the success that suppliers have in arguing against the expectations of the OEM customer. As usual, the likelihood of being able to dodge a request without harming one's chances for future business varies greatly depending on the specific situation for each supplier, so it is difficult to make general statements about what works and what does not. Looking broadly at the interaction reported by the survey respondents, however, it appears that the automakers had the most sympathy when suppliers pointed out that the part volumes were very low, or that the part was scheduled to be phased out anyway. There was also some consideration given when the supplier argued that it had already invested a great deal of engineering effort in order to reduce costs for the part.

Arguments that tended to be less successful for the supplier included those related to rising costs of raw materials, labor, or energy. It is interesting that the OEMs feel little mercy here, since these factors are clearly outside the control of individual suppliers. Of course, they are not within the control of the automakers, either. The message seems to be that the automakers intend to draw the line here--they do not feel that they can pass those rising costs of production on to the consumer, and they will only absorb the increases in their own energy and material purchases, not those incorporated in their production parts purchases.

What a customer asks for, and what they actually get in the way of cooperation from a supplier, are two different things. The companies that had the highest level of cooperation in the form of percentage reductions from suppliers were Volkswagen, Renault and Audi. In spite of its aggressive start, Ford ended up exactly in the middle of the pack. On average across all customers, suppliers gave only 38% of what their customers asked for. Two years earlier, that average was 59%. It is clear that in Europe, as in North America, the easy cuts have been made. Now the question is, how close to the bone can suppliers go?

By Melissa Anderson, Vice President IRN, Inc. [e-mail]