The evolving auto industry continues to provide intriguing supply chain stories – most touch on Chrysler and Fiat, which arguably have the collectively most challenges in the industry. The most interesting story (to my mind) comes from Automotive News (So far, no supplier bloodbath — but is that really good news?, Sep 14th. A subscription is needed to read the article but NU readers can reach it by looking at the NU library site.) The article points to the dichotomy between how Chrysler (as well as GM) has dealt with its dealers on the one hand and its supply base on the other. Step back a year or two, and you could find general agreement that the Big 3 had too many dealers in the US and that there was over-capacity among parts suppliers. Both Chrysler and GM took advantage of bankruptcy to dump dealers. The same thing has not happened on the supply side.
This is a little surprising. There were doom-and-gloom forecasts that if industry bailout money was not made available directly to suppliers, they would be shutting down left and right. Some were arguing that even if Chrysler and GM made it through Chapter 11, they might well be hamstrung by a crippled supply base when the market rebounded. But the bloodletting has failed to materialize. Yes, some parts makers have gone into bankruptcy but they are mostly restructuring their balance sheets as opposed to liquidating.
The article points to several reasons for this. One is that the suppliers made out OK as automakers have gone through bankruptcy. Both firms came close to paying their outstanding obligations to suppliers in full. (That is, it was better to be selling parts to Chrysler than to be holding Chrysler bonds.) Further, most suppliers are diversified – selling to, say, Toyota and Ford as well as Chrysler. One automaker thus has little power to force a reorganization of the supply industry on its own. As a consequence, each car maker needs to stay in good standing with suppliers if it wants their cooperation going forward.
That cooperation, however, points to part of the problem. Nearly every car maker plans on having suppliers assume more responsibility. That may mean producing more complete subassemblies (as opposed to mere components) or taking on more design responsibilities. That has been the industry trend for well over a decade. Auto assemblers are counting on parts makers for innovation and it’s hard to fund innovation when there is excess capacity and nasty price competition.
Chrysler’s ramp up of small production has been stalled because an unidentified supplier has been unable to keep. (Chrysler delays 2nd Caliber shift, cites supplier snag, Automotive News, Sep 14th)
If you are Fiat, that whole Chrysler thing hasn’t been so easy. (Chrysler Faces Chilly Autumn, Wall Street Journal, Sep 15).