To cut costs, Detroit automakers are putting the screws on suppliers. But they are doing it in the most appalling ways.
The way to make money in the automobile business is to run your factories at 100% capacity and sell every car and truck at full sticker price. It's not how many cars you make, but capacity and price. That's why Toyota, Nissan and Honda among them made $9 billion in just six months, most of it in the U.S., while Detroit's much larger Big Three are happy to crawl into the black.
If you are stuck with excess capacity and can't unload the cars without discounting them, you resort to cutting costs: Shut factories, fire salaried employes, build lots of different vehicles off the same basic skeleton (a good idea always) and put the screws on suppliers to cut their prices.
Alas, in an incomprehensible stupidity, Big Three bargainers gave up the right a while back to permanently shut factories when they needed shutting. They have cut back their salaried people and are still trying to get the hang of building lots of vehicles off the same skeleton.
That leaves putting the screws on suppliers. Detroit automakers are doing that, and doing it in the most appalling ways.
A new General Motors Fuhrungskommando gives suppliers 30 days to match a rival's lower price--or lose the business. This is a horrendous club and comes when automakers are asking suppliers to invest more in research and engineering. They live in dire fear that contracts will be canceled, with GM refusing to pay them for their investments.
When the industry started 100 years ago, every carmaker was an assembler. It bought parts and put them together. Then, roughly speaking, around World War I Ford and General Motors decided they could build parts themselves better and cheaper. At the time their plants were not unionized, and it made perfect sense that giant employers could be tougher than Old Joe who ran a small parts plant and knew every employee.
But today the hourly labor cost at a supplier may be one-third that of the big automaker or maybe a hundredth if the supplier's factory is in China. So today the assemblers are taking a step back to the old days and buying parts.
I can remember the day when the carmakers weren't too careful about their buying, when kickbacks were common and the president of Chrysler was fired for finagling with suppliers. That was a long time ago.
More recently it's the purchasing department that is the focus of all too much attention, which takes the form of a squeeze on suppliers. General Motors started this a decade ago when its new purchasing boss began breaking contracts and telling one potential contract bidder what another was doing. Since then there have been demands for arbitrary price cuts, 5% this year, 20% over three years. If a supplier squawks, the carmaker recommends moving work to low-wage countries like China.
The great pressure to cut costs comes because Detroit is losing business to the Japanese and Germans.
Ironically, the Japanese, who are as tough as anybody in bargaining, don't squeeze suppliers in quite the same way. With them, a deal is a deal, and if there is a problem, they work with the supplier. They get respect from American suppliers. The German suppliers have high prices, but then they build the parts that make BMWs and Mercedes the best cars in the world.
Before Daimler took over Chrysler, Chrysler had worked out a program with suppliers. It asked them to cut costs, but split the savings with the suppliers. Chrysler was considered the best to do business with of Detroit's Big Three, and Chrysler prospered, too. Then Daimler took over, Chrysler got into trouble, and the new bosses abandoned the successful program for the philosophy of squeezing--squeezing, as they say, until the pips squeak.
All this shortchanging of suppliers comes from a misconception. Toyota, Honda, BMW and Mercedes aren't doing well because of cheap parts or low vehicle prices. Their cars are more expensive than ours. They are doing well because they are building fine vehicles and the customer is willing to pay for them. The Taurus and Malibu wouldn't outsell the Accord and the Camry even if the suppliers gave their parts to Ford and GM for free.
So there are a few rules that Detroit should memorize.
It's the product that matters, not the part's price. Detroit is improving its product, but the attack on suppliers threatens the good work.
It's the best parts that Detroit needs, not the cheapest, because if you demand cheap, you get cheap. And we all know what that does to quality.
And last, you can't have your friends and eat them, too. Cooperation is better than confrontation.
Jerry Flint, a former Forbes Senior Editor, has covered the automobile industry since 1958. Visit his homepage at www.forbes.com/flint.
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