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GM puts squeeze on suppliers

Automaker wants parts makers to open plants in low-cost countries, a move sure to spark fury.

By Brett Clanton / The Detroit News


DETROIT -- General Motors Corp. is launching a three-year cost-cutting plan that will stress the need for U.S. parts suppliers to open more factories in low-cost countries and to become more competitive on costs and price.

The new plan, designed to save GM billions of dollars over time, could increase already simmering tensions between the struggling automaker and its supplier network.

Bo Andersson, GM's purchasing chief, is expected to roll out the plan to 250 top suppliers at a Sept. 22 meeting at the automaker's proving grounds in Milford.

GM is wrapping up a separate three-year program aimed at reducing by 20 percent its $85 billion global purchasing bill as rancor among suppliers over the automaker's cost-cutting demands is reaching a fever pitch.

In an interview with Automotive News last month, Andersson said suppliers have shouted at him and even grabbed his tie to vent their frustrations. "I see much more emotion in our supply base and nonprofessional businessmanship in the last two years than I've seen in my whole career," he said.

While it's nothing new for a Detroit automaker to push suppliers to reduce costs, GM is under particular pressure to find additional savings after losing $2.5 billion in North America this year. GM also is pressing the United Auto Workers to consider higher out-of-pocket health care costs.

The new cost-cutting plan for suppliers is likely to widen the rift between GM and its U.S. auto parts makers, who in a recent survey said their trust in GM had fallen to a 15-year low. Parts makers are struggling to eke out profits because of high raw material costs, weakening sales by Detroit automakers and global pricing pressures. Several large players have been forced into bankruptcy.

In such an environment, GM needs to be careful how hard it pushes, said Jim Gillette, an industry analyst with CSM Worldwide in Grand Rapids.

"There are a lot of fragile suppliers out there," Gillette said.


'Aggressive restructuring'


But GM is making clear that those who cannot keep up will be left behind.

In a presentation late last month to financial analysts, Andersson called for an "aggressive restructuring" of the company's supply base to include only the suppliers who are on board with GM's delivery, quality and cost targets.

In addition, he said GM's North American suppliers needed to accelerate efforts to locate factories in low-cost countries such as China, Brazil, Honduras and India to become more competitive.

As GM expands its global "footprint" into regions outside the United States -- particularly in emerging markets such as Eastern Europe, China and Korea -- it says it wants suppliers to be there to grow with the company and to ease logistics. But GM also is interested in lower prices for parts, a natural byproduct of sourcing components in regions where labor is cheaper -- a sore point for many U.S. suppliers.

"When they start talking about restructuring, it strikes me that it's just a veiled threat that if you don't come through (with lower prices), we're going to get other suppliers," said John Henke, head of Planning Perspectives Inc., an industry consulting firm in Birmingham that conducts an annual survey of supplier attitudes toward major automakers.

GM will not discuss details of the cost-cutting program, but Andersson gave hints about the plan in a June meeting with suppliers.

In addition to addressing the need to locate overseas, the program will begin holding more suppliers accountable for reducing costs. It will also give credit against current cost-cutting targets to suppliers that find ways to take costs out of future vehicle programs, according to a slide presentation made at a June meeting.


GM's plans will overlap


The new program is scheduled to begin in the fourth quarter and run through 2007.

It will briefly overlap and then replace a previous program ending Dec. 31 that GM called "20/3." Under that plan, GM sought a 20 percent reduction in parts purchasing costs during the last three years.

While the 20/3 program brought a "great deal of savings" to GM, it fell short of the 20 percent goal, said Thomas Hill, a GM spokesman, who declined to elaborate. He said that 20 percent was a "stretch goal" the company knew would be hard to achieve and that the new program would be a "continuation" of cost-reduction efforts.

Richard Dauch, chairman and CEO of American Axle & Manufacturing Inc., a publicly traded axle maker in Detroit and a supplier to GM, said he was not aware of the details in the automaker's new plan but would be "open-minded" about the issues the automaker is facing.

"We have to adjust to global competition," Dauch said Thursday after a Detroit Economic Club luncheon. "Each customer has to put together an action plan of how can they compete with great products and with the economic reality. We're all going to have to be part of that. Nobody can wait this war out."

During the previous program, GM was successful in reducing the size of its supply base -- from 3,700 in 2003 to about 3,200 today -- as part of an effort to create a more efficient supply chain. And that figure will probably decline more under the new plan, Hill said.

"As we become more strict about our alignment issues, some suppliers may decide to put their hands up and say, 'We're going to elect not to do anymore business with you.'"

And what about suppliers who decide not to build factories in low-cost countries? Will GM sever ties with them?

"It's not a mandate," Hill said. "If you can make it work where you have operations, whether that's in North America or Western Europe or South America, that's not an issue. The issue is, if you have a target, you may want to look at low-cost-countries as an option."


Overseas factories a must?


Some parts makers have complained that GM has made it all but impossible not to open factories overseas if they want to continue doing business with the automaker.

"Some suppliers have tried to tell GM that not everybody needs to be global, not all the parts need to be global," CSM's Gillette said. "But they just figure that's the way they're going to get the cheaper price."

DaimlerChrysler AG's Chrysler Group recently announced a new supplier strategy that more closely mimics the often-praised relationship Japanese automakers have with suppliers. Chrysler has pledged to reward top-performing suppliers with additional contracts with the goal of forming long-term relationships with parts makers rather than sourcing anew with each vehicle.

But Chrysler also wants suppliers to consider opening factories in regions outside of North America.

"As a supplier, an ability to operate in multiple geographic locations simultaneously is a competitive edge," Tom LaSorda, the incoming CEO of Chrysler, said in an Aug. 29 speech in Detroit.


Toyota seeks cost cuts


In recent years, Toyota Motor Corp. has also demanded as much as a 30 percent reduction in component parts from its suppliers. And last month, Nissan Motor Co. said it is aiming to reduce component costs by 15 percent over the next three years by buying more parts from China and other low-wage countries.

North American auto suppliers will close plants and move as much as 20 percent of their production to lower-cost regions by 2010, according to a survey conducted last year by Roland Berger Strategy Consultants in Troy.

But parts makers are more likely to respond to cost-reduction efforts if automakers work together with suppliers rather than dictating demands to them, said David Andrea, vice president of the Original Equipment Suppliers Association in Troy, a supplier industry trade group.

"The proper way of looking at supplier relationships is where both sides attack the costs."

GM is also expecting suppliers to play a role in reducing its warranty costs, which have dropped from $35.56 per vehicle after six months in service to $24.90 in 2004. GM's target for 2005 is $22.05 per vehicle. The automaker also is stressing more early collaboration between its engineers and suppliers to avoid late changes in the design of parts, which can produce quality problems.

But GM's Andersson said the automaker will not do business with suppliers who are in bankruptcy. Among the list of suppliers in Chapter 11 bankruptcy protection are interiors specialist Collins and Aikman Corp. in Troy and vehicle frame maker Tower Automotive in Novi.

Delphi Corp., the world's largest supplier, which was spun off from GM in 1999, has threatened a bankruptcy filing by Oct. 17 if it cannot get the UAW to agree to lower labor costs. But GM declined to say how the company would respond if Delphi filed.
http://www.detnews.com/2005/autosinsider/0509/09/A01-309075.htm


:rant: Ok, I understand GM needs to be more competitive and lower their costs, and everyone else is doing it. However, it really ticks me off that they are essentially trying to force their suppliers to replace their American factories and workforce with cheap foreign workers abroad.

I know I am getting to be in the minority of Americans on this, but I still feel it is important to buy American products to support American companies and jobs. This kind of news makes me feel like buying American is almost a futile exercise, since jobs will be leaving anyway.

I just think it stinks. I do not like seeing this country lose so many jobs.
 

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Ok, I understand GM needs to be more competitive and lower their costs, and everyone else is doing it. However, it really ticks me off that they are essentially trying to force their suppliers to replace their American factories and workforce with cheap foreign workers abroad.

I know I am getting to be in the minority of Americans on this, but I still feel it is important to buy American products to support American companies and jobs. This kind of news makes me feel like buying American is almost a futile exercise, since jobs will be leaving anyway.

I just think it stinks. I do not like seeing this country lose so many jobs.
While I don't disagree with you, I think GM and Ford are between a rock and a hard place. Like it or not, they are competing in a global economy, and they have to try to find a level playing field. I don't know what the answer is, except that there are no easy answers.
 

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Editguy said:
While I don't disagree with you, I think GM and Ford are between a rock and a hard place. Like it or not, they are competing in a global economy, and they have to try to find a level playing field. I don't know what the answer is, except that there are no easy answers.
I agree. They are both definately in trouble. Both are bleeding red ink, and many of their latest introductions have not been met with universal praise. Toyota makes about $1500 more on each vehicle it sells than GM does. Over a year, that is one heck of a lot of extra money they can pour into making bigger advances in R&D, quicker redesigns, etc. GM and Ford absolutely must become more profitable to stabalize to compete.

My feeling is that the playing field is not level either, which hurts the big three even more. It is some of the things on this uneven playing field that could be changes, which might help save some American jobs.

Such as Japan having high tariff's on imported cars to protect their domestic makers market shares, but the US not doing anything to force them to allow US makers to compete. With less competition, Japanese companies can rake in more profits at home, and use those higher profits to subsidize North American operations to gain a competitive advantage.

Health care, a touchy subject, is another issue. The Japanese companies are not paying their Japan workers health care as it is picked up by their government. I am not saying whether or not I am in favor of socialized medicine, just pointing out a disadvantage of the big three.

Third, although many Japanese companies have US plants (Toyota in particular) they often are not UAW plants, have lower wages/benefits, and lower number of workers due to high levels of automation. MAny parts also come from overseas suppliers, and designers/engineers are often overseas.

Toyota, to their credit, is probably the most integrated into the US by hiring US workers, building US plants, getting parts from US suppliers, and even building a design and R&D center in Detroit.

Back to GM, it just feels to me like we (the US) is losing. I understand, in the global economy, we are supposedly destined to shed these jobs as we gain other jobs that we have a competitive advantage in. However, not every line worker can be a doctor, computer specialist, bio-engineer, or other high technology worker.

Maybe I am just too liberal for my own good. I just hate to see Americans lose their jobs to overseas workers. (Especially since Buffalo's largest private employer is Delphi, and our Delphi plant is that suppliers biggest money loser. :( )
 

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In my experience in the automotive Tier 1 supply base, GM and Ford need to treat their top suppliers with more respect. I can no longer count the number of times a program was quoted at a volume of XXX,XXX for Y years only to actually sell at XX,XXX and Y (minus) n years.

What's the problem with that you say? Well, in order to get contracts you often have to figure in tool costs into the piece price. You do that based on the total volume over the life of the program. When the volume isn't there, and the program life is shortened, the supplier looses their butts on that program.

Then GM / Ford come back and say... we didn't make money on that program, you need to give us 10-20% in the form of a kickback. We are willing to take a piece price reduction, or a check for the total amount. If you don't cough up the money, you get placed on the "no bid" list. Meaning you can't even bid on the next program... so you have no programs to spread out the loss on. So... you cut the check, hope you get the next program... and can spread your losses around.

The other problem is often times suppliers don't work on improvements in their plants, and simply resolve themselves to pay the required giveback. Eventually they think the only solution is to head over seas (currently China, watch for more development in Nigeria and other areas in Africa) for cheaper labor rates. A lot can be done on process improvements and a good understanding of the cost structure (ABC... anybody know what that is. Solsticeman I'm *sure* you do). One does not have to source parts out of China to compete on a global scale, provided you put forth efforts here in the best areas.

Yes, the UAW has hurt the domestic OEM's in comparison to the transplants. However the UAW does not want to seem to budge (though I recently read an article where the UAW reviewed GM's books and finally agreed that GM is actually in trouble). I'm not going to discuss my viewpoint or what should happen... that only starts a debate and that's not what was intended here.

The domestic OEM's have a responsibility, but so do the large suppliers. I'm not sure either one will learn thier lesson anytime soon though.
 

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To me, it's simple economics in the global economy. The USA has been the big guy on the block for the 2nd half of the 20th century. Companies grew and labor grew with better wages and benefits. We enjoy a high standard of living in this country. Now, bring in the ease of doing business globally. New companies, whether domestic or overseas, can compete and win against these large, older well established companies. These older well established companies have more overhead than these new companies. Most of these additioanl costs are associated with labor benefits from generations gone by (health, pension, etc) and the lack of dicipline on the large companies (excessive corporate reporting structures, higher executive pays, etc).

IMO, the poorer countries who are entering the global economy are going to enjoy a higher quality of life and the countries that have been on the higher end of the industrialized world economy are going to see their standard of living drop down a few pegs because of it.....

I'm not an economist or anything. I'm just saying what I think is going on.... and, oh, by the way, I stayed at a Holiday Inn Express last night! ;)
 

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Should I pack my bags and move to Mexico for work?
 

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Fformula88 said:
http://www.detnews.com/2005/autosinsider/0509/09/A01-309075.htm


:rant: Ok, I understand GM needs to be more competitive and lower their costs, and everyone else is doing it. However, it really ticks me off that they are essentially trying to force their suppliers to replace their American factories and workforce with cheap foreign workers abroad.

I know I am getting to be in the minority of Americans on this, but I still feel it is important to buy American products to support American companies and jobs. This kind of news makes me feel like buying American is almost a futile exercise, since jobs will be leaving anyway.

I just think it stinks. I do not like seeing this country lose so many jobs.
Unfortunately over the last two decades we have moved from a US based economy to a global economy. Thus third world countries are now becoming manufacturing countries and like the US in early years low paying. Over time the workers in the third world countries will begin to put pressure on their employers for all the benefits and the supposed "deal" of cheap labor in foriegn countries will begin to change and manufacturing will come back but we are looking at 10-20 years or more before that happens.
 

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Outsourcing really took off in the '90's with the IT wave. Companies will outsource activities that aren't considered their "core competency" or the one thing that they do better than their competitors. If the core competency yields long term advantage, it's said to be a sustainable competitive advantage. To be really effective, the advantage must be: valuable, rare, and inimitable.

Examples of company characteristics that could constitute a sustainable competitive advantage include:

customer focus, customer lifetime value
superior product quality
extensive distribution contracts
accumulated brand equity and
positive company reputation
low cost production techniques
patents and copyrights
government protected monopoly
superior employees and management team

So, outsourcing is the accepted business strategy to lower cost and bust the Unions. Why pay more? I also feel that the American standard of living has decreased for most of us. GM seems to have lost it's core advantage. Toyota has been ahead of the curve for 10 years with their Prius vision while GM has been focused elsewhere. (like IBM was when Microsoft came on board).
I think it's going to be a real rocky ride. You can see some of the problems with the suppliers just by reading all the posts on Solstice constraints...
 

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My biggest problem with the "global economy" argument is that politically our government is allowing other countries to tilt the playing field in their favor.

Japan has always protected their auto industry with high tariffs for all vehicles. The US has protected only it's light trucks with similar tariff's, allowing imports of cars to sell with little to no tariffs. This is in part why the big 3 are losing a lot of ground in passenger car sales, and yet enjoy a huge sales advantage in light trucks. The imports could not import trucks cost effectively, and only now that they have sufficient US manufacturing capability are they entering that market and gaining some ground. At any rate, that is a very unfair playing field.

A lot of manufacturing has been going to China. Up until very resently, China has fixed it's currency's value to a certain percentage below the dollar. This guaranteed that China would have a very favorable trade balance vs the US no matter how high or low the dollar's value went. In other words, helped make chinese goods even cheaper in the US then they would be under normal market conditions. Again, a very unfair playing field (China also employs very high protective tariffs to protect their industires from imports too).

Those are just two examples, but they are very telling. The global economy is not working freely. The playing field is heavily tilted away. It also begs the question, would it be that cost inneffective to have US manufacturing if these playing fields were leveled?
 

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Soon were all going to work in China
 

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Our parts supply problem may very well be exascerbated by the specialized technology necessary to produce body parts for the Solstice. The only body panel produced by traditional stamping is the one behind the front wheels. We may find it expensive and difficult to replace the clamshells etc. so play nice out there and bring her home in one piece.
 

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Imports and exports are two-way street. You can put tariffs on what you consider your key domestic products that are threatened by China, but since China is considered the largest opportunity in up and coming markets are you prepared for them to in return ban or tax American products and companies trying to establish themselves over there?
 

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Darkhamr said:
Imports and exports are two-way street. You can put tariffs on what you consider your key domestic products that are threatened by China, but since China is considered the largest opportunity in up and coming markets are you prepared for them to in return ban or tax American products and companies trying to establish themselves over there?
That is just too simple. I am not against the global economy, but those we trade with need to be playing fair. If they are going to take measures to protect their own industries (as China and others are doing) I think we should protect our own too.

In fact, we already do. We protect our light truck industry with high tariffs. On the other side, Japan protects their car industry with light tariffs. It hurst US automakers penetration into Japan, but it has also made them a ton of money on the SUV craze of the last 15 years.

One result of this is that Japanese companies are now building truck plants in the US, and hiring US labor to build them to compete here. Consequently, US companies have bought interest in Japanese automakers to get a foothold in Japan (GM's ownership of Suzuki and Daewoo, 20% of Fuji Heavy/Subaru, Ford's controlling interest in Mazda).

Was it worth it? Who knows since we do not know how the industry would have played out if neither side had tariffs. I also cannot say whether that would be the answer with China. However, I would be in favor of any action that would prompt China into a level playing field of competition without artificially tilting that field into their favor.
 

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Fformula88 said:
However, I would be in favor of any action that would prompt China into a level playing field of competition without artificially tilting that field into their favor.
So would I and many, many people who have lost their jobs here.


solli4me said:
Examples of company characteristics that could constitute a sustainable competitive advantage include:
Umm... not to hit below the belt too far, but that looks straight out of my MBA classes. Best thing I learned when getting my MBA was that most of the stuff I was taught was nothing new, and didn't always appear to be correct. What I learned when getting my B.S. (an engineering degree) was that it was nothing new, but always was correct... I learned physical laws in engineering. Point here is nothing on that list keeps jobs here, or helps the current situation. China has a poor record of recognizing someone's Copyright or Patent... well, I guess they recognize it because they copy it right away. That advantage is taken away when dealing with the Chineese (not all, but many). The current situation I speak of is that from my other post... companies tend to look only at cost, and that's all. Notice it's even on your list (I know it's not a list you created... simply the one you provided). If you only focus on one of those, you'll eventually fail.

I seem to recall that labor was always listed as a fixed cost when I went through my Finance and Accounting classes. Wages were set for the year, bonuses / raises were in the budget, and cost was 'fixed'. Somehow it's become a variable cost that people want to control. Hmm... All the while 'variables' such as efficiency, investment, and the like are not looked at or budgets are reduced to 'cut costs'.

CoolOne2006 said:
Unfortunately over the last two decades we have moved from a US based economy to a global economy. Thus third world countries are now becoming manufacturing countries and like the US in early years low paying. Over time the workers in the third world countries will begin to put pressure on their employers for all the benefits and the supposed "deal" of cheap labor in foriegn countries will begin to change and manufacturing will come back but we are looking at 10-20 years or more before that happens.
I would counter that by saying over the last two decades we have moved from a US based manufacturing economy to a US based service economy. Countries like China have moved towards a global economy. China didn't make us global... many companies moving to China were in Mexico and India well before they were in China. Many companies are moving to Africa currently. That's why I think it will take much longer that 10-20 years before we see the sort of actions you mention. I don't disagree that it will happen... but it's a longer time table than 20 years. People have been going to China in mass for over 10 years now and you haven't seen much of a change in that country. There are other parts of the world which Corporations will exploit to avoid that sort of thing from going on.
 

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Fformula88 said:
That is just too simple. I am not against the global economy, but those we trade with need to be playing fair. If they are going to take measures to protect their own industries (as China and others are doing) I think we should protect our own too.
Agreed. It was a conscious decision to over simplify. I am all for working towards leveling playing fields, I just don't agree with protectionist policies.
 
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