Think European suppliers have it better?

Businesspeople in the European automotive industry are getting increasingly hot under the collar, but this is one phenomenon that is not related to global warming. Temperatures are rising because the situation in Europe continues to follow the North American pattern of relying on the supply base to improve OEM competitiveness. Unfortunately, the way in which this is done is usually detrimental to the supplier. The latest report from Hans-Andreas Fein & Associates and IRN Inc., "Price Reduction Requests of Selected European Automobile Manufacturers," published January 2007, describes the status of these relationships.

The 188 survey questionnaires completed in the 2006 study show that suppliers are not only being asked to do more upfront work, but to pay for it, as well. Thirty-eight percent of the respondents reported paying for required prototypes, up from 22% in the prior survey of 2004. Twenty-five percent of the respondents paid for tooling, up from 18% two years earlier. The suppliers are investing time and money upfront in design, drawings, part testing, simulation, 3-D models, intensified technical service (including placing a resident engineer at the customer), and carrying out administrative tasks for the OEM, just to cite a few of the points that these companies shared in the survey.

[GRAPHIC OMITTED]

In addition, the European suppliers have to address requests from their customers for price concessions on current and potential jobs. Two points illustrate the status of this dynamic in the European industry. The first is that the average price reduction requested by automakers of their suppliers rose slightly from 3.9% in the 2004 survey to 4.2% in 2006, according to the survey data. The second key piece of information is that the automakers were successful in obtaining a much larger portion of what they were asking for from suppliers. Comparing the amounts requested to the amounts that were given shows that this average "rate of fulfillment" rose from 38% of the request in 2004 to 69% in 2006. It is possible that suppliers to the German and French automakers were feeling more magnanimous in 2006, but we suspect that this increase in concessions was a function of more hard-hitting pressure to comply.

In fact, this round of the survey included a question that asked specifically about the nature and tone of the interaction through which the companies concluded their agreements with the automakers. The words that they used to characterize the atmosphere of the negotiations were then grouped into increasing levels of intensity or negativity and arrayed in the accompanying pie chart. While this is not a scientific model, it yields a picture that is both familiar and striking to the North American industry participants who are in the midst of this dynamic. The pie segments starting from the orange piece and moving to burnt red show that the interaction has become predominantly negative, leading to characterizations such as "chaotic," "intimidating," "racketeering," and "incompetent." Study author Hans-Andreas Fein says that distinctions can be observed between different automakers, however. "One of the remarkable results is that, both in the data as well as in the comments, BMW, Porsche, and, to some degree, PSA look very good and get acknowledgement for their cooperative approach--and those have a strong family as, or among, their ownership. Wherever the stock exchange is setting the rules, the purchasing policy seems to be quite rude. And in support of this, we note that the Mercedes purchasers, formerly always respectful in behavior, have now turned to the 'rude side,'" Fein stated.

The point here is not to make an idealistic "can't we all get along" plea, but to raise a caution that a negative and hostile atmosphere rarely brings out the best solutions. Some industry participants may be tired of hearing Japanese automakers held up as an example like the student at the head of every class, but our observation is that they generally manage to achieve a combination of high expectations and satisfactory results while keeping an eye on the big picture, and without abandoning the quality of 'professionalism.'

One of the suppliers in the European study characterized the nature of its interaction with PSA as "correct, but without soul." That comment makes me smile every time I read it, since it seems to indicate a completely different (and, dare I say, French) sensibility from the typical American auto industry executive. Most suppliers would probably settle for soul-less interaction, but there is certainly an unmet wish for rational, reasonable, honest, and straightforward negotiation. Over the long term, suppliers will go where they can get that.

The Atmosphere of the Negotiations

Dictatorial, "racketeering"     10%

Cold, frosty, impertinent       11%

Tense, aggressive, angry        16%

Determinative, demanding but     8%
polite

Tough, but fair                 12%

Other                            5%

Okay, moderate                   8%

Friendly, fair, cooperative      8%

Partner-oriented, constructive  10%

No response                     12%

Source: Hans-Andreas Fein & Associates and IRN Inc.

Note: Table made from pie chart.

[e-mail]

Melissa Anderson, Vice President, IRN, Inc.