Tiers of a Crown - The Ever-Changing Face of Automotive Tier Supplier Economics, an Advisory by Industrialinfo.com

DETROIT--Jan. 1, 20044, 2004--Researched by Industrialinfo.com (Industrial Information Resources, Incorporated; Houston, Texas). In the early 1990's, automotive Original Equipment Manufacturers' (OEM) began to rethink their overall operating premise. Historically, these industrial North American giants had the run of the playing field and had been responsible for incredible economic and lifestyle impact on the average American since the end of World War II.

While the OEM's manufactured a good deal of the total car, important large suppliers were known as Tier I vendors. For example, it was at one time possible to visit Ford's Rouge Michigan complex (Plant 1514765) and see molten steel at one end of the plant and a finished car coming off the assembly line at the other end!

Tier I companies of their day enjoyed a special prestige - they knew they were on top of the heap - and so did everyone else. While certainly, Tier II and III suppliers had a presence, they most certainly were not privy to some sensitive R&D and pricing information.

From that time (1990's) some things changed very quickly...others not at all.

One industry observer sums it up best. "Simply put, the American auto manufacturers decided to become assemblers instead of manufacturers," says Thomas Patterson - a respected manufacturer's representative of thirty years (Northern Industrial Sales, Incorporated, Birmingham, Michigan).

In short order, entire divisions were being spun off by the Big Three creating household words such as Delphi Corporation (Troy, Michigan) and Visteon Corporation (Dearborn, Michigan). In theory, a lesser tier supplies the tier above it. In reality, it is actually possible to supply yourself - and be a multiple tier organization. As a result, OEM reliance upon the tier-manufacturing sector increased.

The spin-off practice produced mixed levels of success. Most notably, the almost picture-perfect American Axle & Manufacturing Incorporated (Detroit, Michigan) and the surviving Delphi as compared to the seriously troubled Visteon.

But, there were other forces at hand that would contribute to the winds of change. The Japanese had reinvented the wheel! Domestic passenger car market share started to evaporate at an alarming rate. Soon the Japanese were building better cars and winning over American consumers in large numbers. The end result - Toyota announced on the opening day of the prestigious 2004 North American International Auto Show (January 4-19 Detroit, Michigan) that they now have sold more cars. See related IIR Industry Alert: http://www.industrialinfo.com/showNews.jsp?newsitemID=37332 Automotive Industry Shows Muscle at 2004 NAIAS, the World's Largest Trade Show in Detroit

OEM's now started to lay heavy cost demands on their supplier base to compete with the lower cost imports - no costing structure or contract was sacred.

Still, further savings were needed to compete and salvage domestic market share. China and the Pacific Rim offered new opportunities in cheap manufacturing that paralleled earlier OEM successes in Mexico and South America.

It seemed for a time that American Tier suppliers would never find a workable solution for effectively competing with the offshore markets, which had by this juncture also attracted considerable capital investment from U.S. firms. Many industry observers exclusively pointed the finger at organized labor. In reality, medical coverage and ballooning pension fund expense was all part of the recipe.

The most controversial Tier subject in any automotive camp today (and with suppliers at NAIAS as well) is the migration of international OEM's, suppliers, and vendors to America's Deep South. Organized labor has been largely unsuccessful in these emerging markets, due mostly to existing Right-to-Work legislation and lower cost of living. See related March 22, 2002 IIR Industry Alert: http://www.industrialinfo.com/showNews.jsp?newsitemID=972 Is the Deep South the "Detroit" of the Auto Making Industry for the 21st Century?

The Black Box approach to suppliers is aptly explained by Thomas Patterson, "The OEM and/or Tier One entity bring you a model, drawing, or concept and tell you they want it to do this and that and fit into this much space - weighing less than a specified weight. And before you leave they remind you that it better work better and cost less than the other guy's widget," he adds knowingly.

Oddly, some things haven't changed at all. "In many cases, it is entirely possible to be manufacturing and supplying the same part to the same OEM (end user) and have sold the product through three or four entirely different purchase orders over the years," adds Patterson. On the positive side the supplier is sometimes insulated from OEM cost cutting measures if the appropriate savings can be found through other vendors or another component of the assembled part.

Necessity is said to be the Mother of Invention and the OEM's and Tier suppliers continue to work together with solution based innovations such as Just-in-Time (JIT) manufacturing practices that address essential and timely deliveries, while reducing warehousing expense.

Another popular trend is supplier parks, which allows the supplier to locate the manufacturing or at least module assembly adjacent or very near to the OEM facility. See related IIR Industry Alert: http://www.industrialinfo.com/showNews.jsp?newsitemID=37459 Seeing the World Through PPG Glass. Additionally, supplier parks provide some protection for the OEM with respect to foreign suppliers - reducing the risk of lost, damaged and late shipments.

And many suppliers and vendors have agreed to consignment inventory agreements, which keep the delivered parts or materials off the purchaser's books until they are actually used.

One thing is certain in listening to the dozens of exhibitor OEM's and thousands of visiting vendor executives - if you're a tier supplier to the automotive industry - you'll be expected to deliver more and get less.

Check out Industrialinfo.com's new http://www.industrialinfo.com/esautoov.jsp Automotive Database, including the most recent automotive manufacturing and tier supplier plant and capital project spending data and news coverage.

Industrialinfo.com is the leading provider of global industrial market research. We specialize in helping companies develop information solutions to maximize their sales and marketing efforts. For more information send inquiries to industrialmanufacturing@industrialinfo.com or visit us online at www.industrialinfo.com.