Businessweek Archives

A Shrinking Supply Of Suppliers


Industry Outlook -- Basic Industries: AUTOS

A SHRINKING SUPPLY OF SUPPLIERS

American auto makers will rely on fewer parts suppliers in 1996. Ford Motor Co., for example, has reduced its stable from 10,000 to 2,300--and aims for 1,150 by decade's end. At the same time, Detroit has suppliers building a larger percentage of the content of its cars than ever.

What gives? The consolidation is driven by auto makers who lean on suppliers to provide entire systems for vehicles--an entire dashboard, for instance, instead of just the ashtray that goes into it. Detroit is handing off more development responsibility to suppliers, too. This favors those companies with plentiful capacity, capital, and skills. Smaller players must merge or lose the business. Some become second- or third-tier suppliers to the remaining giants.

The Big Three want global supply networks. A supplier who aspires to U.S. business in 1996 may have to be able to deliver the same parts to factories in Germany or Brazil. Among those that analysts say may grow by acquisition in 1996: Borg-Warner Automotive, Dana, and Lear Seating. Says TRW Inc. Chairman Joseph T. Gorman: "There will continue to be massive [supplier] consolidation as markets that were once national or regional become global."

Big suppliers will end up with some extra burdens. "The cost pressures on suppliers are still tremendous," says Kenneth L. Way, chairman of Lear Seating Corp. in Southfield, Mich. "You have to share engineering costs and design costs if you're a tier-one [supplier]." And auto makers keep demanding price reductions. The focus of supplier ire for 1996 is Ford purchasing chief Carlos E. Mazzorin, who wants suppliers to cut their prices by 5% a year.

Even so, Morgan Stanley & Co. analyst Stephen Volkmann projects suppliers' earnings will rise 15% to 20% in 1996. Price increases for raw materials have eased lately, he notes. Suppliers of car parts may suffer spotty slowdowns, but business in truck components should remain robust. And Japanese car companies' expansion in the U.S. provides new market opportunities for the best U.S. suppliers.By Kathleen Kerwin and Bill Vlasic in Detroit


Toyota's Hydrogen Man
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus