Seeking world peace

The rapid growth of competition in the last quarter of the 20th century forced European and US car firms to seek out cost savings or perish. Both in-house component makers and outside suppliers have been affected profoundly, as the pursuit of cost savings has seen the transfer of in-house supply to an outsourced provider. This shift has enabled a greater exploitation of economies of scale in parts production, but has also produced a rationalising of vehicle makers' supply structure.

During the 1980s, a major rationalisation occurred, with a reduction in the number of suppliers to the US and European car makers from 2,000 to 2,500 at the beginning of the decade to between 1,000 and 1,500 at the end. At the same time, these car makers were trying to reduce the number of suppliers to each assembly plant to between 350 and 500. This goal was reached by the early 1990s. However, the number of suppliers for each Japanese assembly plant was already much lower, at 170.

Auto makers had come to the conclusion that more parts could be produced more economically by specialist suppliers than by in-house divisions.

Vehicle firms can reduce the number of suppliers in a number of ways. First, they can rank suppliers by assigning whole components to a 'first-tier supplier'. Second, even without tiering, car companies can cut the number of suppliers by reducing the number of parts used in components. Third, parts can be sourced with fewer suppliers than previously. Although at the time it was suggested that the aim was to replace sourcing from multiple suppliers with sourcing from a single one, single-supplier sourcing has not subsequently become general practice, as the vehicle firms do not want to become totally dependent on a particular supplier.

Vehicle firms have become more willing to outsource, where previously there was a reluctance because of quality control concerns. Now, with various quality control monitoring techniques, beginning with statistical process control, there is much more confidence in suppliers' ability to perform at the highest standard.

In addition, the greater willingness to share detailed information on the cost of each production step improves the trust between supplier and vehicle maker. In the lexicon of lean production, this was the way to replace the adversarial power-based relationship.

However, this is still very much an ongoing process, as there is much to be done before the historically adversarial relationship between car company and supplier is reversed. Even so, progress is being made and we are seeing, for example, a greater use of relationships on a global scale.

European model

Historically, the suppliers always had a larger role in the total cost structure of cars in Europe than in the US. The US motor industry worked at a North American continental level so the inevitable shake-out of producers as competition took its inevitable toll occurred on a continental scale.

These historically smaller assemblers did not have the scale or funds beyond their formative years to perform the range of activities themselves that Ford and General Motors of the US did for 50 years. Furthermore, and partly due to this, there has always existed a number of strong European suppliers, such as Bosch, GKN, ZF and SKF, with a clear technical lead in certain component areas.

So the tradition in Europe has always been for the large suppliers to be more talented. In practical terms this meant that, for instance, rather than working to drawings supplied by the vehicle firms, many have engineered complete components for the assemblers. Hence, as vehicles became more complex, many suppliers were well placed to provide the technical, but also commercial and economic, solutions needed. This meant such advances reinforced, not weakened, outsourcing.

The size of the leading European suppliers reflects the fact that the European components market is the largest in the world. The top 20 component firms in the 1990s accounted for one-third of total sales of components to the assemblers, net of the supplies to the aftersales market for service and repair.

In the slightly smaller US market, it is the top 30 companies that account for one-third of total component sales to the vehicle firms. The large component makers are becoming as multinational as the vehicle firms, with plants not just spread throughout Europe but around the world.

Outsourcing trends

If outsourcing increases, then work can be transferred to either a domestic or non-domestic supplier, each of which eventually has its own consequences. In the former case there is no great job loss to the domestic economy but there is certainly a switch from one enterprise to another. This can have major implications for individuals, localities and trade unions. In the latter case, there is the issue of transferring work abroad to the detriment of the home economy.

Even outsourcing to another domestic source can involve issues about transferring work to a company that pays lower wages and that has lower-value terms of employment generally. This has always been an issue in Japan. The jobs-for-life philosophy of major manufacturers did not apply to their suppliers.

Hence, if a Japanese vehicle firm experienced a surplus of labour, or aged labour had become too expensive, personnel were transferred to subsidiaries. The vehicle firm did not sack them but the 'subsidiary' might. The increase in outsourcing that involves a transfer of sourcing abroad also became embroiled in the general issue of offshoring, a matter of particular concern in North America.

The change in customer/supplier relationships is not all one way. For instance, BMW is considering insourcing and developing competencies in electrics, electronics and software in order to avoid loss of expertise and power. A particular issue is that the product cycle of an electronics provider may not be the appropriate lifecycle for the vehicle firm. At a national level, outsourcing abroad can mean the hollowing out of activities and expertise so that the remaining critical mass is too small to be sustained.

Figures suggest that the proportion of the value of various automotive activities carried out by the vehicle firms will decrease significantly between 2002 and 2015 (see table below). Apart from vehicle interiors, electronics and electrical components, there will be a significant increase in outsourcing. This will be so even if only 50 per cent of the predicted increase in outsourced share occurs. These are the major components that hitherto have seen the most involvement by vehicle firms, and some areas have been dominated by them.

We could therefore see strong employment growth in the supplier industry, while that in the vehicle firms falls. At the same time, this will need a large growth in investment by the suppliers and this need will underpin a continuing process of consolidation.

A by-product will be the importance attached in the future to value-adding clusters: a form of networked cooperation among vehicle firms, suppliers, research institutes, universities and so on.

Such clusters will offer stronger innovation capabilities and greater efficiency. Where outsourcing is concerned, these clusters will weaken the case for more pure cost-cutting moves, and could reduce the incentive to offshore to low-wage countries. That is, the clusters will anchor firms and create benefits that outweigh any achieved by offshoring.

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