Keller

For the past decade, being an auto parts supplier to General Motors, Ford and Chrysler has been frustrating and often unprofitable. The insults and injuries began with the arrival of Inaki Lopez, the idiosyncratic Basque, who was briefly credited by Jack Smith for lowering GM Europe’s costs. (He was later credited for destroying the quality of GM Europe’s cars by awarding contracts to companies with lowest price that often lacked the engineering or capacity to deliver.) Lopez brought with him the warrior diet and the conviction that he could raise productivity and asset utilization at GM’s parts suppliers and capture those savings GM in the form of lower prices. After he had ruined GM’s relations with its suppliers, Lopez his benefactor literally standing at the altar he jumped to Volkswagen taking with him thousands of sensitive GM documents before fled the country.

Lopez was followed by a GM purchasing philosophy that brow beat price cuts from suppliers during multiple rounds of bidding. I personally witnessed the jubilant knuckle wrapping on the conference table by the purchasing group after getting the low bidder to again reduce his price after he was told he had lost the bidding.

GM wasn’t alone, and for many years Ford was the least-liked auto company. Ford’s Carlos Mazarin practiced the same arbitrary tactics toward suppliers. Long-term contracts were rebid even when annual price reductions were agreed to and Ford and GM wanted access to the supplier’s technology. Raw material price reductions were supposed to be passed on but higher prices became the problem of the supplier. No one cared that the automotive supply industry was becoming increasingly fragile.

In the last two years Chrysler and GM demanded more price concessions along with rebates on past business. Chrysler sometimes reduced the amounts it paid on existing invoices while GM demanded, and often got, cash rebates.

During the second half of the 1990s, high vehicle production and the ability of some companies to sell modules and systems resulted in more dollars and content per vehicle. The parts industry consolidated in a wave of multinational acquisitions among Tier 1 and Tier 2 suppliers that allowed some companies to have better economies of scale for a time. Into this benign environment GM spun out Delphi, and Ford launched Visteon hoping that they were permanently rid of their uncompetitive parts divisions.

Now it’s payback time for the parts industry. Not only are GM and Ford facing direct or indirect compensation to Delphi and Visteon as the former sees its credit rating slip to near junk status and the latter engages Ford in discussions to take back factories that will never be competitive and should never have been included in the spinout of the operation. The consolidation of parts companies into fewer larger entities only means there isn’t anywhere to go when a company fails. Intermet and Citation were decent companies in the 1990s. But neither could survive contracts that failed to compensate for higher raw materials prices. With both companies in bankruptcy, the auto companies and some Tier 1 suppliers will have to pay more for their components.

The latest company to make headlines has been Tower Automotive, another entity cobbled together from a series of acquisitions in the 1990s when it was a favorite on Wall Street. Fixing this one is also going to mean higher prices as well as a reduction in capacity and Tower getting out of some contracts where it can’t make a profit. Tower noted that it faced a liquidity crisis brought on in part by slow payments from customers. A quick look at GM’s balance sheet tells you that GM has increased its trade payables by some $6 billion over three years as it uses supplier credit to fund its operations.

Two months ago a small seat cloth manufacturer briefly shut down because its factory was losing money. This action threatened production of seats for some pickup trucks since there was no one to pick up the slack. Oxford Automotive is bankrupt again and dozens of smaller companies have simply closed their doors for good.

The auto parts industry cannot continue to financially support the auto companies. Higher prices, fewer suppliers and less engineering help are the consequences of years of shortsighted behavior toward suppliers that have pushed many companies to the brink. In the 1980s, MIT investigated the competitive advantage Toyota had through its close and symbiotic relationship with its suppliers. It’s a lesson Detroit never learned or maybe something got “Lost in Translation.”

Maryann Keller is a veteran auto industry analyst and author of the books “Rude Awakening: The Rise, Fall and Struggle to Recover at General Motors” and “Collision: GM, Toyota and Volkswagen and the Race to Own the 21st Century.”