Auto OEMs need to hold up their end of the bargain

Cruising the floor at last month’s Society of Automotive Engineers (SAE) show, one couldn’t help but be impressed by the technology and products on display. From new methods to custom build interiors to groundbreaking plastics applications for structural parts, the show created the perception that, when it comes to making cars, the future is not only here, it is one in which nearly anything is possible.

The SAE show, the auto show for people who design and build cars, is not a typical trade show. Being a show geared for engineer-types, it is a geek’s paradise. More significant, the main focus of the SAE is to showcase the capabilities of manufacturers, like yourself, rather than suppliers to manufacturers as does, for example, the NPE. Not all the companies exhibiting at SAE are plastics companies of course. Also, as it costs a lot to buy exhibit space at a show like this, most companies displaying wares are either well-established firms or companies with promising potential. Still, as trade shows go, SAE offers a view of the big picture and trends in auto making, as well as a benchmark of manufacturing capabilities.

Yet, behind the glitz of technology and supermodel-manned booths lay the reality of management pressures that have been slowly building on the automotive industry for two decades. Already these pressures have led to significant changes in the way suppliers and OEMs are doing business. They are sure to lead to more.

Cost-cutting, according to one survey conducted at the show, is still the number one concern across all levels of the industry. No surprise here, but with suppliers and OEMs having already cut the easy fat, future cost-cutting is likely to take more dramatic form.

The rationale for cost-cutting is simple: In 1982 the average price (in 1997 dollars) of a passenger car in Canada was $9,864, according to DesRosiers Automotive Consultants. By 1996-97, the average price had risen to $22,797, an increase of 131 percent. A personal computer, by comparison, costs about 30% less today than it did in 1988.

In effect, the price of a new car has become a budget buster for many families.

In fairness, automotive OEMs, like drug companies, face tremendous investment costs in product development life cycles related to regulation. Today, a newly launched vehicle must pass a growing battery of safety, crash and environmental tests before it ever reaches the show room. Sticker shock, not surprisingly, has some of its origins in government intervention and policy.

Still, the car companies have not done enough to contain their own costs.

Suppliers, in many cases, have given the OEMs all they can give. They are justified in thinking of the cost-cutting programs endorsed and enforced by the OEMs as little more than extortion: You want the business, you give us our price.

It is high time for some integrity and soul searching on the part of the car companies. To start with they could look at strategies aimed at addressing some of their own facilities’ high overhead, lagging productivity, model duplication, overcapacity and obsolete equipment and production methods. Their one-dimensional approach of putting the onus of cost-cutting solely on the backs of suppliers is driving good companies out of the business. But then, maybe that’s what they want to do — reduce the supplier base to those companies that are willing and able to meet their demands. The approach may pay off in the short-term, but on the long horizon, putting more and more business in the hands of fewer and fewer mega-suppliers could, by reducing competition, reverse cost reduction.

Even a cost-cutting guru could tell them that.

e-mail: mlegault@corporate.southam.ca