Global Fastener News

October 13, 2004 FIN – The good news is that Big Three automakers’ price cutting appears to be losing its effectiveness, Kim Korth told a joint session of the Industrial Fasteners Institute and the National Fastener Distributors Association.

“Four or five years ago the Big Three still dominated,” automotive supply chain consultant Korth of IRN Inc. recalled. “They have lost clout. The Big Three can no longer control prices.”
A key to the future is to help suppliers take costs out of the process rather than just cut costs and margins, Korth suggested.
She observed that the current leadership of the Big Three “grew up under the cost down” philosophy and “haven’t figured out” how the market must change.
Conversely, “Japan has a consistency of vision and execution. Cost reduction is the focus instead of price reduction,” Korth explained. The Big Three have a focus on price reduction rather than cost reduction. “Price cuts are an unsustainable model,” Korth declared.
“If you can make money in automotive, you can make money anywhere,” Korth commended fastener manufacturers who succeed in the automotive sector.
An average company in another industry may see an 8% return on equity. In automotive it is 2.3%. “The further from the OEMs the better.”
In 1961 the Big Three had 14% operating margins. For the last three years their margins were less than 2%, Korth pointed out.
In 1999 suppliers had 7.2% margins, and the figure has dropped to between 4.5% and 5%.
The Auto Market is Huge
Why be an automotive supplier? The automotive industry is huge, Korth explained. While the global office furniture market totals $25 billion, automotive worldwide is $950 billion. The top 25% of automotive suppliers make 60% to 70% of the profit, while the middle 50% break even, Korth noted.
And for current suppliers there are “huge barriers to exit” automotive, Korth pointed out. A family company relies on the salaries, and “you really need an elephant gun” to close your company.
Another factor making automotive a tougher business is the shrinking average showroom age. As recently as 1992 a design would last an average of 3.6 years. That is down to 2.5 years for the next three years.
That means automakers and suppliers must recoup design costs in less time, Korth pointed out. Suppliers need to adjust to a volume-per-auto platform rather than years for a car or truck model.
“There is a correlation between sales and age of the vehicle,” Korth observed. A short life cycle “has a significant impact on suppliers.”

How to Succeed in Automotive
“If 50% of your business is with the Big Three you should be worried,” Korth warned.
“Give yourself a choice. Diversification allows you to control your destiny,” Korth advised. “Identify your key competencies and the barriers to entry.”
“Make it painful for that company to leave you,” Korth recommended. Price may be less of an overcapacity issue than a case of availability of substitutes. Aggressively manage customer expectations, Korth urged. “Pad the front end,” she advised.
Your customer mix and program mix are key indicators of success. ”
• If customers have multiple substitutes, you have little or no leverage, especially low in the supplier chain. ”
• Understand your cost structure.”
• Seek a “more partnership orientation with the customer. ”
•You need to be a low-cost producer. “Take care of your existing business. Get good at what you do.”
• “Understand your competition, and understand your customers’ decision making process,” Korth said.
“Have a finance vs. an accounting mentality.”
• “The number one criterion for success is to dominate the intellectual products and processes,” Korth declared. ©2004/2013 Fastener Industry News
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