In early 2009, during the darkest days of global recession and economic crisis in the U.S., there was quite a raging debate on the merits of corporate bailouts, particularly those related to major brand owners in the U.S. automotive industry such as Chrysler and General Motors. The political debate got intense, especially on the merits of government bailouts of private corporations. We at Supply Chain Matters argued that the more important concern for the industry was the overall supplier base, and the concern for the cascading effects to that supply chain if one or more OEM’s went out of business. In a later commentary, Prescriptions for Detroit’s Supply Chain Crisis, we again pleaded that more money to bailout the OEM’s would be a waste unless there was a way to insure more viable integrity of key component suppliers, which at that time, provided a more precarious scenario of multiple failures. That was then.
Yesterday, The Wall Street Journal featured an article, Smoother Ride for Auto-Parts Makers (paid subscription or free sign-up account may be required), which noted that in just a year, the surviving supplier network has begun turning the corner towards profitability with new forms of restructured businesses. Examples noted include ArvinMeritor Inc., American Axle & Manufacturing Holdings Inc, Lear and TRW Automotive Holdings Corp.. The formulas focus on divesting of non-core businesses and further investing in emerging growth businesses and higher growth emerging markets such as Brazil, China. India and Russia. ArvinMeritor will become more specialized in commercial truck components. Lear now has its focus on car seats and electronics. Dana divested of frames and suspensions to focus on axles. American Axle and ArvinMeritor opened new plants in China and India. The takeaway for readers of the article is that many of these suppliers are now in a much better financial position, but the longer-term scenario is dependent on a rebound of the U.S. consumer in buying more autos.
We would dare say that there were other factors as well. The OEM’s realize more than ever that a viable and functioning supplier network is in their best interests. Supplier viability is just as important as contract performance. Supplier viability may not have translated to a holding company structure on the part of the OEM. The dual coupling of the strategic interests of suppliers as well as the OEM’s has also occurred. OEM’s may have desired more of a one-stop destination of component supply but that may have caused suppliers to have an unwieldy cost vs. revenue structure. Restructuring of costs and health benefits reform certainly played a role as well.
Let’s return to the original debate regarding the existence of a viable and vibrant U.S. automotive supply chain network. The signs of turning the corner are obviously far more positive. The government bailouts of Chrysler and General Motors probably saved the bulk of the industry by allowing key suppliers the time and motivation to independently restructure their business models. It has also opened the door for new or different supplier entrants or parts distribution models. The open question moving forward, however, is whether it is a U.S. supplier network or a global-based network of parts suppliers that emerges.
What is your view? Was de-coupling of OEM and supplier interests a factor?