In late 2008, CSM highlighted an important connection between the tumbling fortunes of Chrysler, Ford and General Motors (GM) and the resulting impact on the North American supply base if any (or all) of the three domestic OEMs progressed into bankruptcy. Analysis of CSM's Supply Chain and Technology database revealed that as many as 70% of US suppliers to the Detroit 3 also supply Asian OEMs in North America, and nearly 50% supply European OEMs in North America as well.
Coupled with a continued dismal production forecast through at least the remainder of 2009, the strong thread of connectivity across the North American OEMs and their supply base provides solid evidence that we're truly all in this together. It is abundantly clear that throughout our global automotive industry no company, brand or market is protected from the economic catastrophe occurring today.
However, even with most of the attention being paid presently to Chrysler and GM - bailouts, buyouts and foreign tie-ups included - there has been significant progress in recent months to recognize and protect the tier 1 and tier 2 companies that will continue to provide the foundation beneath any OEM looking forward to surviving this crisis.
In March, the U.S. Auto Supplier Support Program was announced, in large part through the tireless efforts of the Original Equipment Supplier Association (OESA) and other industry groups, and is intended to provide some essential breathing room for struggling suppliers through various "quick pay" terms and a guaranteed receivables benefit. With $5 billion of direct aid to split between GM and Chrysler, many anxious suppliers now have at least some hope that they can ride out the near-term production slide. However, with recent reports indicating that as many as 30% of all North American suppliers are already in or near a "perilous" state, the ability to string out some temporary cash flow doesn't equal a sustainable survival strategy.
Since the beginning of 2009 we've seen large, global, top-tier suppliers with a consistent legacy of profitability - suppliers most wouldn't have considered to be especially "nimble" - move swiftly and suddenly to close plants, cut staff and curtail R&D investment in breathtaking fashion. Less noticeable, but as painfully profound, is the increasing number of smaller suppliers throughout the Midwestern U.S. and elsewhere closing their doors, leaving behind disrupted and distressed communities.
This is where the concept of "criticality" emerges as a new talking point in the evolution of OEM-supplier relationships.
It makes sense that a supplier could be classified as "critical" in two ways: 1) they are very near to insolvency; and/or 2) they provide a component that is essential to building a particular vehicle. Recently, a lack of financing caused a small Canadian transmission supplier to abruptly stop shipping parts to both Chrysler and GM, shutting down two Chrysler plants. It is likely that as more suppliers reach such "critical" financial conditions, OEMs will be forced to either move production in-house or aggressively and urgently re-source production to other suppliers, some of which may not be in much better financial shape.
Shadowing this complex parts management issue is a unique and problematic flip-side to the government-backed supplier aid plan. The OEMs themselves hold the purse strings of the available federal funds and important matters of supplier eligibility, participation and ultimate financial benefit rest squarely within the purchasing organizations of Chrysler and GM.
In the past, the government has said that it is not interested in picking winners and losers despite much evidence to the contrary in the automotive and other sectors. Regardless, the notion of Chrysler and GM buyer groups influencing the landscape of the supply base moving forward, perhaps using some unique measures of criticality, has some suppliers concerned that if they are not near the front of the funding line their businesses are in even greater jeopardy.
Through all this, CSM has continued to investigate the connection of North American suppliers to key OEM programs - the high-volume, high-profile programs Chrysler, GM and Ford are counting on to pull themselves out of this economic sinkhole. Our research looks specifically at suppliers holding a high percentage of sourced business, or exposure, with Chrysler or GM and has identified the key programs for other OEMs that those suppliers support.
CSM analysis shows that as many as 116 suppliers with high exposure to Chrysler or GM also supply up to 100% of some critical parts for high-volume Ford, Toyota, Honda, Nissan and Volkswagen programs. With this cross-OEM connectivity in mind, CSM specifically identified over 90 non-GM programs that could be immediately impacted if key GM-dependent suppliers fail, potentially crippling North American production capacity across the country.
In fact, OEM concerns over supplier insolvency have revealed a fundamental risk associated with the connectivity of the North American supply base. The strategic aim of Asian OEMs to develop a strong regional production capacity in recent years has led to an unavoidable reliance on the existing supplier network to supplement their own keiretsu or other preferred Asian parts providers. Recently, in a stunning reversal of their renowned lean practices, Toyota responded to the genuine threat of supplier bankruptcy by beginning to stockpile key parts for certain vehicle models, replacing Just-in-Time with "Just-in-Case" and evaluating the relative health of their key suppliers on virtually a daily basis.
Although this scenario is not a foregone conclusion, what is worth watching over these next critical weeks and months is how each OEM and supplier navigates the inevitable redefinition and redistribution of the parts-making process itself. Every movement and adjustment ripples through this closely woven, symbiotic industry. The fight to stay solvent at both the OEM and supplier levels could overwhelm any collective intentions to be transparent, collaborative and innovative, attributes that ultimately are essential for the recovery and long-term health of the automotive industry.
In the popular game Jenga, the objective is to precisely and carefully remove pieces from a complex structure previously built, in a manner that forces your opponents to pull out the last, decisive block that collapses the whole thing. Looking at the current state of the North American automotive industry, the building blocks of the business, or the supply base, are being removed through accelerating market contraction and overwhelming economic hardship.
It is quite possible, maybe even probable, that when one or another of the remaining domestic OEMs goes bankrupt, the supplier community will collapse as well, perhaps not entirely but certainly with a loud clatter. It is at this critical point that our industry and government together must choose wisely which pieces of the supply base remain in place since those choices will determine the outcome; either "game on" or "game over."
John Eaton may be reached via email at johneaton@csmauto.com.
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