Ford Rethinks Supply Strategy
Friday, September 30, 2005
Ford Motor Co. yesterday outlined a new parts-buying strategy that the company said would shore up the shaky auto-supply sector.
Ford said it plans to give a select group of 100 suppliers longer and bigger contracts and back off from constantly demanding lower prices. The company said it is looking to cut by half a list of more than 200 key suppliers of the most expensive equipment that go into building a car, such as wiring harnesses, seats, instrument panels and brakes.
Ford officials say they want to take the supplier relationships "to a different and new level" to ensure consistent production and possibly reduce its costs. Both Ford and General Motors Corp. are trying to head off a financial meltdown in the sector that threatens the health of the entire U.S. auto industry. If the parts suppliers collapse, the automakers would face paralyzing production disruptions and financial repercussions of their own.
Both Visteon Corp. and Delphi Corp., the two largest auto-parts suppliers, have recently contemplated bankruptcy. Delphi says it needs a bailout by former parent GM and concessions by the United Auto Workers union to stave off filing for Chapter 11 court protection.
U.S. automakers have little choice but to try to help resuscitate the suppliers, said Kevin Tynan, senior auto analyst with Argus Research Corp., an independent company research firm in New York. A bankruptcy filing would cause a huge disruption to GM's manufacturing ability. Ford, in its announcement yesterday, named both Delphi and Visteon in an initial group of long-term supply partners.
"It's really not a zero-sum game where one wins and one loses," Tynan said. "It's really everybody or nobody."
Ford's new parts plan affects about half of Ford's $70 billion annual production bill. Ford officials think a strategy of working more closely with suppliers will foster greater collaboration and lead to better quality. But the officials wouldn't say how much money Ford might save with the streamlined purchasing process. Japanese automakers tend to build stronger ties to their U.S. suppliers. In surveys, suppliers have rated their relationships with Japanese automakers as superior to those with the U.S. companies.
Ford's decision to close ranks with suppliers comes as the financial condition of the U.S. auto industry continues to deteriorate. Visteon, the parts maker that Ford spun off in 2000, was able to avoid bankruptcy earlier this year only after Ford agreed to take over 17 unprofitable plants along with other facilities in U.S. and Mexico. Delphi has said it will have to file for bankruptcy protection if it doesn't get the GM bailout. Delphi also says it needs the UAW to agree to cuts in the pay and benefits of laid-off workers andto the transfer of a larger burden of health care costs onto factory employees. General Motors is also trying to negotiate similar concessions, but so far the union hasn't budged.
The strategy that GM and Ford embarked on six years ago of spinning off their parts making factories into stand-alone companies appears to be falling apart. At the time of the Delphi spinoff, GM said the split would allow management to focus on developing and assembling vehicles, not on parts for vehicles. Ford spun off Visteon based on similar reasoning. At the time, leaders of the UAW vociferously opposed the spinoffs and fought for strong wage and benefit protections.
But competition in the industry has grown increasingly fierce. Material costs have grown. Economic slowdowns and increased competition from Japanese, European and Korean rivals have made passing price increases on to car buyers nearly impossible. Lately, the shrinking demand for large, profitable Detroit-built sport-utility vehicles has squeezed the U.S. auto industry even further. With nowhere to go, the Detroit automakers have turned to their supplier base for better pricing. "All of a sudden we are paying $3 at the pump and SUVs are falling out of fashion. Delphi feels that pinch just as much as General Motors," Tynan said.