Auto Supply Companies Face a Rough Road : Manufacturing: Parts firms are in the midst of a major shakeout as Detroit’s Big Three try to slash costs.

When Walt Bartkowiak shelled out $1.5 million for a new paint system at FitzSimons Manufacturing’s auto parts plant last year, he didn’t think he was being rash.

He had, after all, solicited and received a commitment from longtime customer General Motors Corp. The auto maker had said it would buy a million of his fuel-filler tubes--the pipes that carry gasoline from the pump to the car’s fuel tank--with the new coating his engineers had invented to prevent corrosion.

But a few months ago, as the finishing touches were being added to the new machinery at FitzSimons’ factory in Big Rapids, Mich., GM told Bartkowiak that the deal was off. Or at least subject to renegotiation.

“Thirty-five percent of this company’s business is with GM, and 80% of that is out being (rebid) right now,” says Bartkowiak, worriedly admiring one of the newly painted tubes at the company’s barn-like headquarters and plant on the east side of Detroit. “That’s kind of scary.”

There’s no “kind of” about it for the thousands of GM parts suppliers who were abruptly informed in June that the auto maker was ripping up existing contracts and throwing up for grabs the $50 billion it spends annually on parts and materials. The fear is tangible among auto suppliers these days as they scramble to try to save their GM business or stay afloat without it.

But while GM’S tactics are the harshest U.S. parts makers have ever seen, they are only the most recent in a series of efforts by the Big Three Detroit auto makers to slash their own costs and improve quality by fundamentally transforming their relations with their parts suppliers.

Indeed, the auto parts industry, which logs $100 billion in annual sales and employs about 600,000 people, is in the midst of its second massive shake-out in a decade. Reeling from record losses in 1991, the Big Three--whose parts purchases account for about 50% of their total costs--are insisting that their suppliers both cut prices and shoulder more of the financial burden for developing parts.

At the same time, Detroit is moving sporadically toward forging closer and longer-lasting ties with a handful of suppliers worldwide. Industry executives, analysts and even suppliers view the evolution as vital to the survival of the Big Three. But the grinding process of elimination will mean the end of thousands of auto suppliers as they exist today.

Although some of the immediate strain on the Big Three’s parts makers has been eased by the auto makers’ return to profitability and healthier production schedules in recent months, many of them--especially those who are smaller and more financially vulnerable--say their own long-term survival is in doubt.

“I have to remain optimistic. I have to remain confident,” says the president of a Detroit-based gear supplier. “But two weeks from now you could call me and I could have a very different story for you. These are real difficult times.”

Faced with such uncertainty, some suppliers are anxiously seeking work from the once-impenetrable Japanese manufacturers who are under political pressure to buy more U.S. parts. Some have moved their operations to Mexico to reduce their labor costs, or expanded their operations to other parts of the globe in an effort to keep up with their increasingly international customers. Some have sought out ways to apply their manufacturing skills outside of the auto industry.

And many, discouraged by disappearing profit margins, are simply closing up shop.

The latest series of contractions in Detroit is especially painful for a supplier industry that has barely recovered from the shock of the 1980s, when the Big Three’s dramatic loss of market share to their Japanese competitors sent hundreds of U.S. parts makers into bankruptcy.

Confronted with stiff competition on their own turf, GM, Ford and Chrysler closed plants, scaled back production and began demanding annual price reductions from their suppliers. The only ones left standing at the end of the decade were those who had achieved major improvements in their own productivity.

But now, GM has changed the rules again, promising to redirect its business to suppliers who can meet its new price, quality and service demands. Ford--which in 10 years has halved the number of parts makers it buys from--plans to cut its 1,500 suppliers to 1,000 by 1995. Chrysler aims to have 2,000 fewer suppliers at the end of the decade than it did at the beginning.

And the nation’s No. 2 and No. 3 auto makers are keeping a sharp watch out to see how their larger rival fares in its cut-throat quest for price concessions of as much as 30%.

It’s a traumatic time for the hundreds of auto suppliers who have molded themselves to fit the needs of the three companies whose existence they depend on for their own. Many of them compare the recent turn in their relationship with GM to going through a painful divorce.

“Companies of our size basically emulated what (the Big Three) wanted us to be. Now they’ve changed their mind,” says a bewildered sales executive with Greenville, Mich.-based metal stamping firm R. J. Tower. “So the question for us is, how can we again become what they want us to be?”

For some, the transformation Detroit is demanding will be beyond reach. Analysts say those with the capital to invest in new technologies, develop more complex components, expand to international markets and take advantage of economies of scale have the best chance of survival.

The smaller firms that have historically thrived on the margins of Detroit’s amorphous sourcing system will likely become “second-tier” suppliers to the larger suppliers--or disappear.

It is a circular dependency: With a recent study estimating that it costs GM $2,700 more to build a car than Toyota--the industry’s low-cost producer--many suppliers know full well that the nation’s largest auto maker must slash its costs if they are to survive themselves.

But suppliers and analysts warn that if the Big Three press their parts makers too hard, they will end up with a weaker and less competitive industry in the long run.

GM’s strategy of opening bidding auctions for parts that a supplier has already spent money designing and developing has been especially criticized as counterproductive: “They can squeeze us for a year or two, but if they do it too much we’ll die. And when they want someone to design a part for them next time, we won’t be around,” one supplier said.

Big Three purchasing executives say they are aiming for higher productivity, not lower profit margins, for their suppliers. And with varying success, each of the U.S. auto makers is striving to move away from the traditional antagonism of supplier-manufacturer relations toward “partnerships.” Their model: a modified version of the system of their Japanese competitors, who build 25% more vehicles with one-seventh as many suppliers as the Detroit companies.

“It may sound a little brutal, going from 3,000 to 1,000 (suppliers) in 10 years,” says Norman Ehlers, head of purchasing at Ford. “But we have found that it’s hard to be a partner with thousands of suppliers.”

Under the new partnership doctrine, suppliers are no longer handed a blueprint and told to build it. Instead, they are involved much earlier in the car-building process and can tailor their investments to the manufacturers’ needs--without going bankrupt in the process. And their contracts are more likely to extend for as long as the vehicle is produced, rather than the scant 12 months that is currently the norm.

But in exchange for greater security, the Big Three want suppliers to take on more of the burden of developing and putting together systems of parts. Instead of purchasing all of the ingredients for seats from 10 different suppliers and assembling them on site, Ford now buys the whole seat from one supplier. Ehlers says suppliers now handle 30% to 40% of the design and development work for the 3,000-odd parts that go into each vehicle, compared to about 5% a decade ago.

Fewer suppliers shouldering more responsibility means auto makers are more dependent on their supply base than ever before. And they have more of an incentive to keep their suppliers healthy and profitable. But suppliers say that that logic has not yet been grasped by everyone in Detroit.

Chrysler is generally regarded as the most enlightened of the three, with GM a distant third. And J. Ignacio Lopez de Arriortua, the Spaniard imported from GM’s European operations to head its new global purchasing activities, has not helped the auto maker’s popularity among its suppliers. The nickname bestowed by GM’s European suppliers has stayed with him: They call him “The Grand Inquisitor.”

But even Lopez--who helps maintain his executioner’s mystique by refusing to talk to the press--has won suppliers over to his camp by sending squads of engineers into their plants to help them achieve his price demands by working with them to cut costs.

Lopez’s teams have visited 40 North American supplier plants already, yielding productivity gains of more than 50% on average, says Lopez deputy Alan Perriton.

Ronald Palmer, head of Taylor, Mich.-based Horizon Enterprises, hosted a Lopez team in his screw works plant that managed to reduce costs by 9%. “We both won,” Palmer says.

But despite such successes, suppliers retain a deep mistrust for GM’s new purchasing czar. Some accuse him of pursuing short-term returns for the auto maker’s unprofitable North American operations at their expense.

David Aldredge, vice president for sales and marketing at Lake Center Industries, which makes wiper switches, dome lights and heater controls at its plant in Winona, Minn., is not waiting around to watch its GM business go to the lowest bidder. The firm now supplies all the heater panels for the Toyota Camry. And Aldredge suggests Lopez could learn a thing or two from its Japanese competitor.

“Toyota talks about partnership, and they demonstrate it,” Aldredge says. “I don’t think (Lopez) cares if we make money or stay in business or not.”

Ralph Miller, president of Warren, Mich.-based Modern Engineering Co., which builds tooling for auto assembly plants, has refused to participate in what he calls Lopez’s “Dutch auctions” (where the bidding goes down, not up) and has lost some contracts as a result. But Modern Engineering, which has seen eight of its 30 competitors fold in the last two years and its own payroll cut by 20%, has found business elsewhere.

The machine tool firm just built a conveyor system for the U.S. Postal Service, for instance. “It’s moving bags of mail instead of door panels,” Miller shrugs.

Many of the bigger players in the auto supplier community, such as aerospace giant TRW Inc., see the upheaval in the U.S. supplier industry not as a signal to look elsewhere for business, but as an opportunity to expand their automotive ties, both here and abroad. GM’s promise to open up the bidding on parts for its European operations to U.S. suppliers--and vice-versa--has scared some suppliers. But those with already established international operations believe they will benefit from the world-wide auction.

“This massive consolidation will result in a few strong survivors worldwide, and they will supply the world,” says TRW president Joseph Gorman. “That’s why TRW is working so hard to expand in Europe and Asia.”

Timothy Leuliette, president of ITT Automotive, says his firm, which posted sales of $3.4 billion last year, expects to grow 40% in the next three years. ITT’s deep pockets have allowed it to take on more of the parts development and financial responsibility that auto makers are looking for in their suppliers.

Instead of just making brake parts, ITT now builds entire brake systems. And when a customer recently expressed interest in purchasing ITT’s anti-lock brakes but was unable to pay for the tooling and capacity up front, the supplier simply worked out a financing arrangement with them. “We become sort of a financial institution at the same time,” Leuliette says.

Suppliers are also hoping that GM will honor its vow to take business away from its own parts-making divisions--which now supply 70% of its components--if they can’t beat the bids of outside suppliers.

Long regarded as the supplier industry’s high-cost producers, GM’s parts divisions have continued to earn the auto maker’s business largely by virtue of its labor contract, which mandates that its United Auto Worker union workers get paid nearly full salary whether they work or not. If the divisions lose business and lay off workers, the contract stipulates that they must be paid regardless.

GM’s in-house parts makers stand to lose as much as 50% of their business if Lopez is true to his word, analysts say, which would in turn cost the UAW tens of thousands of jobs.

Lopez’s price demands also add impetus to a Mexican strategy for many suppliers. Almost 70% of suppliers responding to a recent poll by an industry trade publication said they were “very likely” or “somewhat likely” to move work to Mexico under the proposed North American Free Trade Agreement.

Whoever survives and however they do it, most analysts, suppliers, and auto executives agree that the auto industry as a whole will be stronger in the end. Indeed, Wall Street analysts note that there is money to be made by those watching this extended weeding-out process.

“If you can pick the guys out of this mess who are going to survive, they’re going to become much larger and much more profitable,” says Scott Soffren of Lehman Bros.

But those who must live through it are not quite so cavalier. At a recent auto industry seminar, suppliers mourned the passing of Autodie, a Grand Rapids, Mich., die maker that filed for bankruptcy protection earlier this month.

“We’re extremely nervous,” says Larry Enders, sales vice president at Standard Products, a Dearborn, Mich.-based automotive supplier. “It’s the toughest we’ve ever seen it. Ultimately we’ll have a strong industry that survives. But who the players are going to be is a big question mark.”