AAH #698 - The Brilliant and Abysmal Relationships Between Automakers and Suppliers

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your journey, Gary John, how are you. I'm doing well? You

too, Absolutely good. I think though at the top of the show,

this is the eightieth anniversary of a d DA, and I think that we have the freedom to be able to say all kinds of stuff on the show, whatever we want. And you know it's it's those people that made that

happen, no doubt about it, right, yeah, no, a historical time for sure. Absolutely what an event. But let's talk automotive. Let's

go right to it. Right. In fact, we got to tell the

audience. We got Dave Andrea here from Plant Moran. Every year they do

is supply or survey, and boy, we're going to dig into the results of that. And we've got Ken Zeno with us too, a longtime automotive

journalist and PR executive. And so yeah, you probably have the first question,

mister Vassila. All right, So, so Dave explained to the audience

what the OEM Supplier Relation Index is all about. You guys been doing this

for a long time. It's been validated for years and years and years.

Give us a snapshot the snapshot is it's been going on for twenty four years.

It actually was started by doctor John Hankey of an Oakland University professor in marketing, to be able to judge quantitatively the relationship between the vehicle manufacturers and the suppliers, because it is a messy relationship, so how can you quantify it? Make it standard to judge it year by year so you can see

what the track record is and you can also look across the vehicle manufacturers to see how well they stack up. And so it's about one hundred question survey,

six open, open ended questions, and I'm always surprised that the suppliers do take all all of the time that they do to go through to take it seriously. They take it very seriously because it's anonymous, it's confidential,

and this gives them a way to give their honest feedback to the vehicle manufacturers.

And just a quick story, last year, we were up against the Friday deadline and I got a call from one of the top ten suppliers who said, Dave, can you keep the survey open through the weekend? So

what do you mean? He said, Well, we haven't got our guys

together, and we haven't filled it out, so can you just keep it open through this weekend? That of all of the suppliers who I would have

thought had leverage and the confidence to tell the OEM directly what they felt, it would have been this supplier. But they used our survey as a conduit.

So you're saying that this supplier you would have thought would have been able to talk to their counterparts at the OEM and say, you know what, this relationship is not as good as it should be, or this relationship is the nicest thing I've ever Well, when you think about leverage, right, this is one of the top ten, and so by dollar amount they have leverage, and certainly by technology and innovation they have that as well. But

they felt comfortable going through your survey, not going through executives at the car a company you're purchasing execs, especially at the cart exactly, John right, Perhaps sorry, but perhaps I might add that I once worked for a senior Ford purchasing executive who, in support of your story, was described by a major major supplier as the ISAAD alligator all teeth, no ears. But that's

a classic Can I use that? Yes? So I mean give us a

sense, So you know, we talk about suppliers and OEMs. Okay,

describe what the importance of suppliers are to car companies. Well, at the

dollar amount level, they're seventy to eighty percent of the dollar amount of a vehicle. So when you when you look at the transaction price and take out

dealer profits and take out the manufacturer of profits and look at the cost of good sould, that's that's outside purchases, that's the supply base. So yeah,

look for the audience, let me just say, what you're really saying is the car companies only make twenty percent of the car they buy eighty from suppliers. When you think about what they have vertically integrated the vehicle manufacturers,

the engines, the stamping assembly value, that's that's their core, and of course the sign of the vehicle. And you know, because other people are

going to be screaming at us, wait a minute, Tesla's not that way.

Tesla's far more vertically integrated. Bid is far more vertically integrated. What

we're talking about are the legacy auto makers in North America buy twenty to thirty percent or only make twenty to thirty percent. They buy the rest from supply

press correct, and they rely on suppliers for most of the innovation that goes into cars. Yeah, so when you're when you're there, Gary, So

when you're thinking about from the dollar amount side, I mean think about it from the innovation side. All of the news, the software and the other

sensors and all those types of things. That knowledge is resident with the supply

base. And so that's that's why the relationship is so important. And just

a couple of examples here we've done We've done studies for other vehicle manufacturers outside of the serve, outside of the public survey, and they're doing it because they aren't in the top realm. They aren't going to have the volume to

get the supplier's attention, so they want the relationship part of it to get the supplier's attention so that they work with the other vehicle manufacturers. Dave,

here's the thing about your survey. For twenty four years now, Toyota and

hont have always been at the top. Always they go up and down a

little bit every year. Your latest survey shows them actually improving. Lately.

General Motors has been getting better, but it trails them. Nissan's been all

over the map, it's below GM and then Ford and Stilantis. I mean,

suppliers don't like Forder Stalantis. They don't like the way that they're being

treated. Why is that and why after so many years are automakers not looking

at it and say, hey, we got to get a relationship better on the top end on Toyota and High to I think it's because they're primarily engineering driven companies, and so and then as well, and I do believe it with Toyota is about human relationships in terms of in terms of taking care of people because they know when the problems come up, they know they're going to pick up the phone, it's going to get answered, and the suppliers are

going to have their a team out resolving the problem. And and and so

I think it's it is definitely a cultural piece with them, but starting with engineering and also manufacturing kind of being at the core of what they do and how they go about their job. With with Stilantis and Ford at the bottom,

and as you look at the historic chart, you know they've they've been up in the top four, you know, and then dropped down and then now are at the bottom. I want to say that's a piece of the

relationship in the organization and the purchasing organization and specifically with stilientis if you go back to Chrysler days and with Dan not I mean that Dan was an engineer, right, very very well respected, came over as the head of purchasing and and the suppliers would you know, go to Helen back right for him.

They loved him. They loved him, and the product were good,

the pricing was good, the delivery was good. So you could you could

do that from that standpoint, but you see that it's not integrated into the way they do business because it's it's one individual and unfortunately for for Dan passing away way too early he died of cancer. Yeah, that jet then it

drops off. The other piece of it is if you think about the regime

changes at the top of those companies too, you really have to be aligned top to bottom to make any of these relationships work. And that's that's where

it comes down to. With GM. I'll say with GM, what's been

impressive to me with them is they've gone through three vice presidents in five years.

Right, They Steve Keeper, then Keifer went to International, and then Chilpanaman came in, right behind him, and then he got a promotion out of there, and Jeff Morrison is now the head and they have continued to increase. So that shows me then at least with GM, it's getting more

institutionalized. So I think that we need to give the audience a sense of

what we're talking about here in terms of the difference between these companies. And

so this is on a scale of four hundred, which basically is unobtainable.

I think, do you do you agree anybody would well? Okay, on

one side, in terms of just even survey methodology. You know, when

you get a survey right, it's and and these are these are on a one to five scale, very very rarely will you circle the five right?

You put the four down? So yeah, okay, So Toyota, this

is the this year's Okay that just came out a couple of weeks ago.

Okay, Toyota is at three six eight, Honda three four four, GM two ninety nine, Nissan two fifty five, Ford one ninety seven, Stilantis one fifty two. Okay, it's not even half of what a yawning gap

it. So there's always a curd to me. And then if you and

as John said, I mean, if you look at this over the years, I think Honda beat Toyota once in twenty five years. But those two

have just been bumped along at the top. And so you have a ten

year performance index forward down seventy points, Stilantis down ninety three points. Yeah,

well, how do they build cars? Well, you see the big

stair steps too, right with Stilantis, going back two years when they put out their new terms and conditions, they had a riot on their head.

Yeah, and I mean suppliers won eight and they ended up firing their top two purchasing execs right in North America and internationally and pulling back their terms and conditions to their old terms. And so if you think about all of the

expense of putting out new terms and then going through the corporate debates and the expense of pulling them back, that was that's never I don't believe has ever happened in the industry that way. And because of those terms impacted all of

the suppliers across the board. There was that revolt right and now, and

when they changed leadership both in Paris and in Auburn Hills, the survey reflected that in a better way. Oh yeah, it jumped up. Yeah,

correct, it reflected those changes and they bounced back up. Marlow that okay,

yeah, but going from one to a whopping one two. I mean

when you talk about jumping up again, well, it's off of the bottom.

Gary, I'll give you that. It's off of the bottom. But

the thing is now, even year to year improvements are going to be so difficult because you have to win back the trust and getting back to Toyota and Honda being on the top. The mindset of that purchasing organization has to change

completely, and that's so very hard. Yeah, hi ken Zeno. Again,

let me just point out that in my experience, I was on an earnings call after the disruption from Shanghai and the COVID and so I'm on the Toyota earnings call and the head of Toyota says, yes, this is a real problem. Our customers are waiting too long for our cars and we have

to do something to help our suppliers. I go to the Ford earnings call

and the head of Ford says, yeah, it's a disruption, but the good news is we got to raise prices on the Mustang period. There's there,

it is, Yeah, and and the thing the difficulty in all this is so thinking about we have to help the suppliers. Those are those that

can be a cost in the near term that gets accounted for, right, So that's why there's a lot of resistance to that. What we can't account

for is the better launch six months from now or the better technology a year from now that helping the suppliers today resulted from. And that's where it has

to come from the top leadership on down and then have engineering and manufacturing, support purchasing as well. So, Dave, when you come out with this

report, did the car company say, hey, come on in, we want to go through the numbers with you. We want to get a better

understanding of it. Do you talk with them? Oh? Yeah, absolutely,

So before the press release comes out, we go and sit down with each of them individually to give them their results. And of course they're always

egging me trying to find out what the other OEMs do. It is a

competitive industry without a doubt that way. And then the press release comes out

and then we go through with each of them and give them their report and sit down. I'll tell you, from top to bottom is a pretty good

gauge of engagement of who's who asking me questions? That was going to be

my question. I mean, the companies at the bottom of the list,

They've been at the bottom of the list for years now. Do they not

care that much? Do they ignore this I mean? Or or are they

asking for help? How do we improve? I think they use the survey

internally because it's honest, fair, neutral data. I don't know that they

have that support from the other from left to right, for the other organizations, or certainly from the top. So look, let me just give general

motors for instance, I'll probably have three or four meetings with their staff.

They tear it up. What does it mean? In a constructive like They

tear it up? What does this mean? How do we work on it?

And Jeff Morrison has me come into his staff meeting and present the results, and you can kind of see him set the tone around the table of how he wants each of his direct reports to work with each other, and that filters down Nissan. Nissan has me come into their supplier Advisory committee that

the suppliers and present the results. The suppliers are there and Nissan leadership is

there, so they're hearing the same message of how we how the suppliers are judging that, and again that's that's the right tone in terms of responses.

So you guys are fairly granular in making this survey. I mean you look

at different parts of the vehicle. You look at different types of relationships,

time, timely communications, effective product development involvement, resolve payment issues in a timely manner, resolve tooling, on and on and on. So is it

a case where the person who is in charge when you're in these meetings like is pointing at his direct saying I have to saying, hey, you know, you're the guy who needs to resolve this communication problem that we have, because you guys say that communication is basically at the core of the good relationships that exis. That works best when we do the survey for the vehicle manufacturer

at the commodity group level, because in the press release primarily reports out corporate but that is built up embody and white. It's different than electrical electronics,

different than raw materials, and so the OEMs that have us do the survey.

We have the data so we can recode it to their suppliers in which groups they're in, and we report those back in those meetings. Yes,

the vice president purchasing then has the data to work with to be able to say, pick an example raw material. It's a communication issue. It's not

necessarily paying your bills, are paying our bills on time. But with some

other groups, it's resolving the price disputes or the tooling disputes effectively. And

then those groups, if they use the data right, can go to manufacturing or engineering and say you have to work with us better because look, we're getting rated down because you're not working with us. So that's how that works.

You know, when it comes to purchasing, it's all about costs.

That's the fixation. But you mentioned several other things benefits that cost accounting does

not capture a launch that goes smoothly because you've got great relations and suppliers are working with you. They're bringing you their latest technology before they show it to

your competitors. If you've got a problem, as you said, they put

the A team on it. Is there any way of capturing the value of

that. You know, top management is driven by cost and they look at

their most of them, maybe not Toyota and Honda, but the rest of them look at purchasing is a way to take cost out, but there's these other benefits that the cost accounting method does not capture. We have tried to

look at all of the financials of the six and to get apples to apples comparison. So take out all the accounting changes, take out all the special

charges, so forth and so on to try to get a clean and then you look at and you look at, for instance, Stilantis's financial performance versus their rating in our survey. It doesn't compute. I mean, there's extremely

profitable and will allow the supplier relations. If I would take that over ten

years and you look at Toyota's profitability or Honda's profitability, it may be less than any one given year, but it adds up to be a better and or if you look at company valuations, right, it's better from that standpoint.

So that's one element of it. The other element what we've done is

we went back and looked at preferred company, which OEM was the preferred customer, and we came out with our customer of choice composite. We went back

through all the data and it was statistically valid and it's it's not earth shattering, but it's into it is intuitive. What makes up a customer of choice,

all right, It's the trust that the supplier has in the customer.

It's about making a fair return on investment in the book of business, and it's about rewarding high performance. It's no different than a if you would do

it an employee survey, employee satisfaction survey, right, and what do you you want to work for a boss that that you can trust. You want

to get paid by the company fairly for what you think you're putting into the company, and and and and so from that perspective, and if you look at the customer of choice, it lines up exactly with the w r I top to bottom. I either they don't want to work with Toyota, right,

Toyota and first Honta and second and now where I think we're going to get to really using the survey you are in the OEM strategy is at the point now where we're the industry is at with the changeover and electrification. Right,

there's only so many suppliers who have the new technologies and the capacities.

When you're thinking about whether it's the battery value chain or electric motors, inverters, power electronics, all those kinds of things. And if those suppliers who

have that technology and capacities they want to they're only going to work with the companies that they they can make money on, they trust and and get rewarded well. And so I think that's where we're going to start seeing supplier relationships

or the supplier piece of the puzzle go up in the in the importance and the importance from that standpoint, because back to some of the other where we may have had revolts in the industry before because it was across the board right impacted every Now, I think what you might see is one or two of these suppliers say, you know, we're going to back away. We're not

going to back And I'll tell you, I mean that was clearly when Nissan hit bottom and we went in and we presented that to Nissan, and then it floated up to the top. That's what got their attention, and what

got their attention were verbatims, were comments and from our study where suppliers were specific we're man Nissan down. And just one last week when I would present

that data, I said, look, it's an anonymous, anonymous survey, and actually I don't even want to know who's saying what where, But you have to know. You have to be certain that the person who's saying we're

managing Nissan down is one of the suppliers who's on your exit list. Two,

because if they're on one of your strategics of wire lists or a new technology list, those are going to be two ships passing in the night and that's a disaster. Can you talk about Stillantis in particular, because this year

is your aware we've had art suppliers refuse to ship parts to Stillantis, they shut down g plants. As you know, they're all involved in a lawsuit

right now. Do you think this will ry up through the organization you're taking

your data? Yeah? The issue there is I do believe those are the

exceptions, the ones that come to the loggerhead and say we can't work anything out other than pulling the trigger on a stop shipment, which is absolutely the worst place both parties want to be in. And so I think that is

that's an exception. The piece Gary, maybe getting back to your question about

how and how seriously do they take it and can these companies ever get off the bottom? Is what I worry about is the mindset that Okay, well

if it comes to that loggerhead, then we find another supplier and we'll just substitute out, because then all of us sudden, it's not an exception.

That becomes more the rule of how you handle supplier relationships. And that's that's

what I worry about. People have asked me, well, wait a minute,

how can you possibly report Stilantis improve their overall relationships this year? But

if you look at the data behind the corporate number, still seventy percent plus of the respondents say they have a bad relationship with Stilantes. So it's not

like they're they're they're they're shifting over their supply base to having much greater or better supplier relationships. Even though the corporate number goes up, it did,

but it's nothing to brag upout seventy percent as still saying they're bad. Yeah,

no, ask Ken, so can when studies like this in the heart a report of years gone by, when it would come into say Ford, and you know you were dealing with the top executives of Ford at the time.

I mean, did these guys believe it or did they just basically say, uh, never mind, Well there's several approaches in bureaucratic organizations. Uh,

the first is denial, the second is the shrug, the corporate shrug, and then the third is yeah, we'll do something about that in an undefined period of time. But well, to come back to the transition now,

I mean basically I view the automobile business with the EV transition, which will happen. I mean it's just a question of when, and there's gonna

be some bumps in the roads. But it was a blacksmithing business, right

you banged it, You banged it, and you shaped it and you welded it. Well, now you're dealing in a much more complex universe. And

to come to Stilantis as an examples of ours, the head It's is on record as saying that there's you know, four stars that have to align and they're all in the areas that David is talking about. I mean, we

have to have clean energy as a society, right, so as that affects Stillantis, well, that there's that's across the board. What are you how

you're powering your plants? What are you know? What are your vehicles doing?

The charging network huge issue and that's beyond any in my personal opinion any corporate tent. Now you're into the WILDCRD of government regulations and subsidies and various

local practices. Uh, there's the product, which is what we're primarily doing

with all the material costs of the product as well. Half I mean,

I mean the enormous So there's where the relationship's got to be really important on the recovery and stuff. And ultimately this all comes down to and let's try

and repeat after me. They used to say once in a while on afford

meeting. We only design and develop and test these things. We have a

customer out there and they've got to be able to afford it. So now

you've got all of these opposing forces and it takes, uh, but it takes. It's a it's a high wire act with no net I basically.

And but I would say, I would David, have you ever looked at quality versus have you ever tried to correlate quality we have? That's a that's

a tighter variable that I think could be done. And not to get into

over tech over technical piece, but you can definitely show a correlation with with quality because I do believe the suppliers with the better relationships they're going to if there's an issue at the at the assembly plant, they're going to send out their best team to try to solve it. And then John, I think

that gets back also to the Toyota culture, is when you when they call on the suppliers and maybe this is the engineering piece, but they're trying to solve an issue. It's not to create the blame or assign the blame,

and the suppliers are going to go into that situation every every day of the year. But if it's if it's about assigning blame, then then they hold

back out the other one, John, as you were talking about, you know, with purchasing, it's all about and this is one thing I want to start expanding the conversation about. Is a supplier when they look at a

return on investment for a business, it's about that program peace price right, without a doubt. But if an OEM, and this comes back to what

you're talking about, Ken, if a supplier tools up for two hundred thousand units of a new EV program and it gets cut in half and the supplier is sitting there with half of its capital unused, that's a cost of doing business and so they could be making a lot of money on all the other parts that they may be supplying, but that one program is going to drag

them down. And so they're going to look at that OEM and say,

we can't make money on you. And that's an element that when we also

look at the survey, we take a look at business practices and buyer characteristics and looking at I think one thing I'll take some pride in over the last ten years and over the last six that we've been responsible for it at Plant marian at least for four out of the six not looking at Stilantis and four that are at the bottom, the buyer characteristics are at the highest they've been

in the last ten years. So the purchasing organizations have really tried and responded.

But there's only so much that the individual can do. And so we

have to start talking about new business practices in the industry to deal with all the volatility. And I got a few examples that we can get. Look,

we got to take a quick commercial break here for a sponsor Bridstone.

One thing I'd point out to the audience. We just came out with our

industry report card that looks at all kinds of things ranks the top automakers in the world. Look at the category for quality and you'll see that what David

Andrea just said, those with the better relationships with their suppliers tend to be at the top. Those who do not tend to be at the bottom.

But anyway, we'll get back to the show in just a minute. Right

now, a shout out to Bridgstone. When the elements are working against you,

being confident in your grip on the road is what really matters. Bridgetone,

A lens of tires, improved acceleration in wet conditions. All right,

we're back talking about the tension that's always been there between suppliers and automakers.

Yeah, let me just up on the piece with quality that it also reflects engineering and manufacturing and the way they work with suppliers too, right, and so it's not just in the purchasing, correct piece of it. Yeah,

So here's something I'd like to ask you about right now. Automakers have got

a transition to EVS. EVS are still too expensive. Automakers are desperate to

cut costs. They're looking at Chinese suppliers who have, based on everything I

read, up to a thirty percent cost advantage. What do you think is

going to happen there? And not just in the US, Europe and elsewhere

too. Here you've got and who knew there would be a whole new supply

chain coming on the scene. You know, we thought, you know,

Europe, US, Japan, South Korea had everything, and now here come the Chinese with a decided cost advantage. How do you think this is going

to play out? It without a doubt. It pressure puts pressure on the

legacy supply base. But for the legacy OEMs to become competitive in this new

world, that's where I think they have to drop the cost their own cost of doing business. And so you're right, the thirty percent can be if

it's calculator right, you know whatever, even if it's fifteen percent, let's say it's huge. But if it goes into a system that's overly complex,

that has laid engineering changes, that has poor quality countries, you name all those elements of it, what does that fifteen percent get you right, you still have to get the mothership has to be competitive to keep that fifteen percent, or it's net netted washes out. Totally agree with, Totally agree,

But you know, at the top you know finance is going to say, hey, look, those guys are a lot cheaper in China, why don't we just buy everything from there, or as much as that we can politically get away with. And I still will contend that you'll see the launch problems,

you'll see the quality problem, you'll see the warranty expenses in there because you don't have the whole system. That's one element that where we look at

for profitability of of the OEMs versus with with the with the supplier relationship pieces.

You just can't pull all those other elements apart. And so if you

have great designs, you're launching on time, it's impeccable quality and the lowest warranty costs that's what wins. And it's not just about it's not the peace

price, it's not beck you might be better off paying a little bit more.

Well yeah, but see that's the other one that you pay a little bit more, but that gets booked in this quarter's accounting, right, And I can't prove three quarters from now, six quarters from now that I avoided.

We can't account for cost avoidance is tough intuitive, it's up there.

So you can't prove a negative. You can't. You can't. So you

know, I want to get back to what you were saying before. And

so a supplier builds a factory or builds a line within a factory to supply in OEM with two hundred thousand units, as you suggest, and that gets cut to one hundred thousand units. Now the supplier has paid for the capacity

to do two hundred thousand correct. Well, yeah, so they've they've expended,

they've invested in that, but keep going. Okay, so then they

find that everything that they had predicted is cut in half. So as we

go into this new ev world, I mean, is that any different than if they were making carburetors. No, it's not, but it's I think

it gets back to what Ken was getting to. We pounded metal, We've

done all the castings, foragings, all those things for all of these years.

We pretty well know how to do that. But now and we have

the factories. You know, maybe it's now a whole new factory, but

look at all the new battery you know, everything else going up. That's

all new square footage. And that's the issue. And it's new technology,

it's new equipments. It's not putting a new mold in a press that's been

paid for for thirty years, right, all new press, it's all new capabilities. So what we've been talking about coming out of this is the risks

and the costs in the industry are going to be there, and so the industry has to adapt to be able to mitigate those risks. So a few

things, So back Gary on your example about the supplier has paid for that two hundred thousand with the x two hundred thousand units of capacity with the expectation at over a four year period in the peace price, and what gets shipped for them to get paid is it's amortized into that peace cost. So and

it's it's easy for me to say the industry has to figure it out, but why can't we have variable pricing? And so explain that which would is

I've priced it for two hundred thousand a million dollars of fixed costs, I can I only ship one hundred thousand, so my variable price is based on one hundred thousand units, not on the two hundred thousand, So I get paid back, but it's over one hundred thousand rather than two hundred thousand, So the price, the variable pricing goes up per heartshipp You got to figure

out, you know, when when do you start and when do you stop that and all those things. But it's it's a smart industry. Withers,

How is this hard? We're trying tours to be able to drive with the

person behind a wheel and they can't figure it's, well, it's hard, Gary, because can do it because what I just said very simply shifts costs and risks from the supply base back to the back to the vehicle manufacturer.

The only would hate that, yeah, because they come out with a car and they discover, oh my god, this is a turkey. No one's

buying it. But we still got to finish out production. And now our

costs just went up because of this variable pricing, even though that would be totally fair to the supply are correct. So that's that's one way the industry

can do it. The other way the industry can do it that maybe,

but again shifts risk and costs onto the vehicle manufacturer, is to separate out the contracts. Meaning you go through and you have engineering and design and tooling,

and you can look at all the labor hours, and you can look at all the fixed costs and all the cadcam support and all those other kinds of things, and the supplier can say, okay, for me to tool up for this program, here's my ten million dollar bill. That's on this

cost, and that's outside of that variable cost that I just ran through.

And if you want to buy one hundred thousand units, that's fine. I

can calculate one hundred thousand units of labor, of materials, of energy, you know, with the standard, all those kinds of thing, and here's your bill for that. That's one way to do it too. I like

that idea, and with with like even going back with Tesla, certainly with Rivian and and and the other startup OEMs. Say Tesla as a startup today,

but when it was initially, that's the way they did it because the suppliers didn't didn't know these Tesla paid for the supplier tooling upfront, tase split if if the supplier held its ground and negotiated, yes, well, look, the repliers have wanted this forever, right, I mean, because if you're in the tool and die business, you start making your your tools, your dies, your molds at least what two years before job one, right,

at least two But you don't get paid until production starts, and that's why so many tool and die companies in the United States dealing with automotive have gone out of business. A CAT is a pure cash flow issue, without

a doubt. Yeah. The third way that I think you can take a

look at this is at job one, the OEM requires the supplier to have two hundred thousand units of capacity in place, all the tools, all the labor. They have to guarantee that. Now, that may be in three

years or four years, but there could be a way. This is harder,

is to stare step that up and say, Okay, the first year it's going to be seventy five thousand, so you have to guarantee that you can ship ship me seventy five thousand parts, okay, and then in year three it goes to one point fifty and in year four or year five it goes to two hundred thousand, and I can steer step that up. That's

more difficult because that supplier is hanging out there for year two or three that they have to know that that tooling supplier is still in business, that they can get that tool, and they can qualify that tool for the right quality and get it in place and have the parts inventory and shipment to be able to hit that number, and they got to prey like hell that year four does hit two hundred dollars, yeah, and doesn't crash on the others on

the other side. But those are all ways that the industry does need to

change the way it does its purchasing model that we've had in place for one hundred years. So do they need to change it because of the uncertainty that

is perhaps growing now then has been the case of the past, or do they need to change it because of the transition to electric vehicles both? And

I would say that because we all talk about the risk on the EV side, Well, nobody has said, oh, if these evs don't sell, the market is only going to be fourteen million units, right, nobody's predicting that if these evs don't sell, we're still at sixteen million units, but we sell five hundred thousand more more internal combustion name plates and body styles and

all those other kinds. So you've got to be you got to be flexible

on both sides. And just think about, you know, with General Motors

canceling the Malibu program one hundred and fifty thousand unit one hundred and thirty hundred and fifty thousand, and you could look out and say, well, every supplier should have known that, you know four door sedam, you know this, that and the other. Well that's okay, But a supplier can't say

that to General Motors. Can't say you're not you're not really serious about this

and get the business. You can't do that. So how does GM respond?

And I think it will come out in the survey. Well, look,

go back to twenty nineteen or so when GM's numbers dropped down. Well,

they had a UAW strike. That was that that they were they were

the stark strike target. They canceled six sedan programs platforms that knocked the knees

out, and they also took out like a third of their of the overall workforce, executive workforce. So and Gary's going to check me on those things.

We're going to check you on those but yeah, okay, but here here's what to check you on. Is that. Okay, today's a big

day for Ford. They're opening up the Grand Central station, Michigan Central Central.

And I mean and so you know, you're mentioning that there was a dip at General motors in terms of the survey. Yet I'm looking at this

and General Motors has not been behind Ford since twenty sixteen when they were down at two fifty. We've we've consistently been seeing Ford going downward. Yeah,

yeah, so in this, I mean it's downward. Even under mister Farley,

it's been just he's been heading side. How is this sustainable? It's

it's not. No, it's not. And even even if the OEMs that

answer specifically with OR four or forth start vertically integrating and bringing parts inside, they have to be good customers because you still have to have the capital equipment, you still have to have everything. You still have to have suppliers to

the suppliers, even if it's internal. And so I don't believe it is

sustainable. And there's breaking points where management changes and then you start reversing.

Now, the problem is, I think the pendulum swings getting back to Toyota and Honda. They aren't They may not make a lot of headlines, you

know, the pendulums may swing back and forth a little bit this way, and that then catching up is more costly. It is without adapt I think,

And and look, it wasn't all that long ago. It was at

the beginning of my career. There was come on, come on, no,

there was there was you know for parts group right internally that became Visitian that got spun on. Look at General Motors had all of that internal capacity

that became Delphi and all the other spin offs there. Why was that,

Well, it was because at that point in time, the OEMs weren't convinced that they could be competitive, that they could be innovative, and so you had to have an independent supplier do that. Well, there's a great issue

here that involves things called the capital mark it's and special items on your financial reports. And that was going back to Motorcraft and Vestiana and that whole disaster.

Uh, that was a way to clean up the balance sheet by moving well, I'm not tensions and way benefits those liabilities. Yeah, but in

the long run, I mean, you're still going to have to make a return on investment, and you're still going to have to publish new reports and including you know, things like ten k's and all those jeury sec regulations, which I don't believe are going away. And it's a you're talking about a

whole I was searching on my mind a whole new type of contract in the business or are there any in place that capture this such as the step price?

Not not across the board, but there are there are one offs without a doubt that have variable pricing in them. The the divided contracts are definitely

with with the new new ev mayor and even but you take a step back and you say, okay, even, how how different? How different is

the Lightning and the Mochi under Model E? Then Tesla was fifteen years ago.

It's a risky venture. Yeah, it's within Ford and with Ford credit

and back to the equity markets and everything you know that Ford has in terms of its stability at a corporate level. But how Model E isn't that much

different than it's trying to get a new new supply base. It's trying to

get new a new organization with a new clock speed, with you know, new new capabilities and so and that's the thing that I think is the big struggle is and you have you have a case study here, you had Ford that was trying to do trying to do two organizations under one, and you know the jury will be out how successful that will be. And I think

the supply base looking at their numbers, a lot was collateral damage between that.

You know, where are we Ford Blue or are we there or there?

Who's it? You know, who's the decision ing? And then you

had General Motors that basically kept everything together. They did separate out some purchase

in groups for software and for other EV components, but they kept it because they wanted to be one GM, and I think that shows up in their numbers. So, you know, John was mentioning before about the Chinese suppliers

being more cost effective if we look at you know, larger BYD coming to this market or other companies, and you said earlier about how part of this goes back to Okay, there are a limited number of suppliers who have the capabilities to provide the OEMs with the new technologies necessary for evs. So presumably

this means that if you're a good customer, you're a Toyota or General Motors or a Honda, the likelihood is that you're going to get interest from these guys rather than if your Stilantis or Ford or or even Nissan to a certain degree, yeah, or even you know, the the suppliers who have kept both capabilities under one roof right, and not spun them off into individual companies.

Yeah, I think that that's where'll gravitate, because you do. They

have financial boshes a little different corporate ownership and things like that, but they have responsibility to the capital markets and to their shareholders. So they're going to

gravitate to where they can make money and where they can get rewarded for high performance. And this was the interesting thing with General Motors this year was they

went up by two points right to two ninety nine. They didn't break through

that three hundred mark. Their measure sure on rewarding high performance mark suppliers went

down by a statistically significant point one five point zero point one five points.

So that meant that if you took a sample out of our sample, the suppliers would have said, no, GM didn't reward me for being a high performer, and and that and they also went It was interesting at the corporate level. They dropped a little bit in corporate trust, but there Jeff Morrison's

numbers, his personal numbers and in trust went up, and the buyer's numbers, My buyer is trustworthy, but the company isn't also went up. And

I'm not saying that GM lost I mean it was point Road three or something where they went down by trust, but they did you know, they were piling it on trust, trust, trust, trust, trust, and it went down a little bit. So so so what happens five years from now,

five years from now, well, the OEMs if they need a greater dependence on fewer suppliers. I mean, the afore mentioned mister Tavares said earlier

this week that he was getting rid of or he would need what was it like, forty five percent of his existing suppliers going forward on the boy, if you're in the other fifty five percent, you're really feeling good about hearing that, No you don't. And that's that's that's a similar position. Oh

he's saying it up front that Nissan was in right where I would be worried about two ships passing in the night is there's going to be suppliers who are in there who may not know are they in the in the in the in the good favor or out of favor. And you always want to control your

own destiny, and so you start managing that down because you know it's survival and and so that that's that's again where I think from the quality standpoint, the cost standpoint, all of those things do show up eventually because that supplier churn is extra costs for the in the ento, the product. It certainly

is extra risk in launching these complex programs and and and I think it ends up hurting the o EM in the long run. So that's how I would

answer you, Gary, We're good. Look, we're right down to the

end of your one very quick last question. Automakers like Ford are talking about

insourcing all the software work. You know, suppliers have made enormous investments to

be able to develop software capabilities. How do you think that's going to play

out? So far? It hasn't played out well from the standpoint if you

think about Volkswagen and the other OEMs that have pulled that in only to see timeline, time budgets and cost budgets get blown through. But it's almost as

if I'm not criticizing the companies, but it's almost as if you have to learn learn it yourself. Everybody is in a different situation, everybody's unique,

so we have to go through it. You know, interesting like with for

it an RGO for instance, that why why didn't that work? And particularly

to share costs with other vehicle manufacturers, and maybe it's because they can't purchase things outside as well as they should, and a whole new genre. It's

not a stamping, it's not a foraging. We don't have a cost model

easily for software. So I I think the pendulum will swing back and we'll

probably have some creative ways that we engineer or around some of those software needs to eliminate some of the need for some of the software, or how do you do a platform architecture that they could do internally. It's not a real

good answer for you, but I think there's ways that we do around it.

I don't think that's one element. Let me just say it this way.

That's one element with great To be able to bring in outside resources, outside engineering, and to be able to pay for it integrate it in is a competitive advantage. I do believe it would be real good. With that,

we're going to wrap up, But Dave Andrea, thanks so much for coming on and letting us get down into the details of the latest supplier survey.

Most welcome, Thank you all. Yeah, thanks Kevin, You're welcome.

Gary. We'll see you again here next week. Absolutely all right,

there we are

AAH #698 - The Brilliant and Abysmal Relationships Between Automakers and Suppliers

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