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Parting Ways?

As the auto industry gets turned on its head, a similar adjustment awaits the parts suppliers. In fact, the term "parts supplier" may not even work any more. Read on to see how this embattled industry needs to cope with its uncertain future.

Unless you've been asleep in the bed of an F-150 for the past several years, you're aware of the dramatic change impacting the auto industry. But whether or not all the automotive manufacturers go into overdrive and merge into one giant conglomerate (or two or three), the auto-parts supplier industry is never going to be the same, either.

Indeed, for an industry that has been beset by bankruptcies, labor strikes and pricing disputes, even the term "parts" supplier will no longer be entirely accurate.

What, then, is the future of the parts supplier industry?

According to Larry Rinek, Frost & Sullivan's senior consultant for automotive technologies, North America, a consolidation of manufacturers in the auto industry could mean a stronger vehicle manufacturing industry that would help lead to business survival for many suppliers, albeit in different forms.

"Vehicle manufacturers are doing all they can to cut costs. They are paring down their supplier list to consolidate buying, and they have cut their engineering and design staffs," said Rinek. As auto manufacturers look to parts suppliers to provide these engineering and design services, this will change how parts suppliers do business.

Still, the scenario of one large parts entity resulting from car manufacturers merging will probably not happen, said Robert Cavin, industry analyst for Frost & Sullivan's North American Automotive & Transportation Practice. Nor would there be any car manufacturers eliminated, per se.

"Rather, the 'mergers' would most probably come in the forms of investment, collaboration, and partnerships in design and engineering," Cavin said. This is where parts suppliers stand to gain market share – from new contracts between auto manufacturers that have developed partnerships and from collaborating with the OEMs on part design and engineering.

A somewhat similar conclusion is put forth by William Pochiluk, president of AutomotiveCompass LLC, a provider of decision support products and services for the global automotive industry. In his estimation, few alliances among car manufacturers have been successful. As for the now nixed GM/Renault/Nissan merger proposal, "there were going to be more benefits for Renault and Nissan than for GM," Pochiluk noted.

The Need For Change

If the OEMs and the parts suppliers are to survive, changes will be needed in how everyone does business.

"Car manufacturers are losing market share," explained Cavin, "and they can no longer sustain the status quo. Individual manufacturers are entering into joint supplier agreements to maintain pricing power with their partnerships. The car makers can request discounts if they buy in volume."

"What the car manufacturers are saying," Pochiluk added, "is that they have nothing more to give for the parts they build. Everyone involved, the car manufacturers and the parts suppliers, has to look seriously at how they can cut costs and still have a viable business."

Simply put, car manufacturers are in the car-making business, and don't want to be in the parts making business.

"Ford does not want to have to stop their assembly line due to a lack of parts or because they don't have a ready supply of air conditioning components," Rinek said. "But the parts suppliers want volume orders and contracts to help make them a more efficient supplier."

Currently, many parts suppliers see their side of the business as a money-losing operation – serving a sick vehicle manufacturing industry. "Many parts suppliers would be happy to get out of supplying auto manufacturers," Rinek said. "They would like to develop non-auto supplier business and find more value-added activity."

Module Supplier, Not Parts Supplier

For the parts suppliers who want to remain in the auto business they'll need to look at a new way of building cars, and the answer will likely be "working in modules – delivering a completed module to the car manufacturer," suggested Pochiluk. It is no longer cost effective or efficient for a parts supplier to just make one part, and wait for the car manufacturer to send in an order.

Pochiluk explained that there are 14 systems that make up a car body. Car manufacturers need to look at each of these systems to determine how each can be made more efficiently and cost effectively. This is where the concept of module part supplying comes in. If a part supplier can provide several parts in a contained module it's much easier for the car manufacturer to produce cars, resulting in cost and time savings.

As an example, Pochiluk described how one lower-end car manufacturer has changed its assembly operations to just nine modules that are simply screwed together at the plant. In another example, he told of a car manufacturer that had 27 different cigarette lighter models for different vehicles. In order to design-out extra costs, they eventually consolidated to just four models – saving on inventory costs, too.

It Will Take Teamwork

"For the domestic parts supplier industry to be successful they must turn around their operations, and begin to collaborate with the car manufacturers on design and engineering," Rinek said. They must become an integral part of the car design function, from the beginning.

According to Pochiluk, it will take investment by the successful and probably the larger parts suppliers to find new methods of production and manufacturing, along with investment by the OEMs in core design and engineering, to turn around the industry.

"There will be a fundamental redesign of vehicle parts and how cars are manufactured," said Pochiluk.

He agrees it will be a complicated, expensive, but necessary process. "There are two areas that must receive R&D funding -- product redesign and process redesign," explained Pochiluk. "These go hand-in-hand."

The end result of all these changes could be the consolidation of some parts suppliers or the weeding out of those who cannot afford to play, he said. "The bigger parts suppliers will see that they have to rethink how they approach the OEM."

Parts suppliers will be the ones to come up with new designs – assembly parts in modules – and take them to the OEM, and hope the car manufacturer understands the cost benefits and assembly efficiency of module part supplying.

Out With The Old, In With The New

Right now, there are two blocks of parts suppliers in the industry, according to Pochiluk – the traditionalists and the "change masters."

The traditionalists are continuing to do business the same way they have done for the past 10-to-20 years – waiting to get an order for part. "The "masters of change" are the ones looking to do things in an entirely new way – coming up with creative ways to drive change through partnerships and alliances with the car manufacturers.

These change masters are not going to just wait to bid on parts, they will take a proactive approach to design and engineering, and will be able to provide a 20 percent to 25 percent cost reduction as an alliance partner.

"They will be proactive in designing the 14 modules that go into a vehicle," said Pochiluk. "The OEM will want to talk to them."

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