DRIVING COSTS

Auto Parts Suppliers Should Resist Pressure from Carmakers

Car parts or part of a car? Suppliers can account for 65 percent of a vehicle. Source: AFP
Car parts or part of a car? Suppliers can account for 65 percent of a vehicle.
  • Why it matters

    Why it matters

    Auto parts firms often can’t refuse demands from carmakers, including even what amount to improper cost disclosures and dirty negotiating tricks.

  • Facts

    Facts

    • Auto parts make up more than two-thirds of a car’s production cost.
    • Parts suppliers have the technology to make cars more environmentally friendly.
    • Germany’s auto industry association favors delaying carbon dioxide limits until after 2020.
  • Audio

    Audio

  • Pdf

Manufacturers are engaged in a round of massive cost-cutting across the German auto industry. Volkswagen’s chief executive, Martin Winterkorn, wants to boost the VW brand’s sagging profit by cutting €5 billion ($6.5 billion.) Daimler CEO Dieter Zetsche plans to reach profit targets with a new efficiency program. Even luxury carmaker BMW is applying new cost-reduction programs to every single operation.

Auto parts suppliers are first in line for cuts, because materials make up more than two-thirds of the production cost for every new car. A 5-percent reduction in the price paid to suppliers for major auto parts could lower the cost of a car by more than 3 percent. The same 5-percent savings in labor costs would cut production costs per vehicle by less than 1 percent. This is what former VW and General Motors purchasing chief, José Ignacio López, used to preach to his cost-cutting “warriors.”

The question is now whether parts suppliers can fight back against the all-powerful automobile manufacturers. For small- and-medium-sized businesses, it’s an extremely tough thing to do.

Buyers at auto manufacturers are demanding that suppliers offer complete cost transparency. But disclosing pricing structures is like filing for insolvency. Displaying what makes up your costs, for all to see, is tantamount to publishing competitive secrets. This puts suppliers at a great disadvantage. Another common strategy for carmakers is to demand additional discounts from the product listIt is not just small businesses feeling the pressure. Mid-sized companies in particular have a hard time standing their ground.

It is beyond reason to think that such conflicts of interest could be dealt with by one person or organization. It is unimaginable, for instance, that Germany’s car workers’ union, IG Metall, and the car industry employers’ group, Gesamtverband Metall, would merge and set work wages for the entire industry. Only God himself could be entrusted to do that.

So it seems that representatives of the German automobile industry are dealing with the Almighty on a daily basis. Suppliers and manufacturers represent their respective interests within one single body, the German Association of the Automotive Industry. Of course, the auto industry group keeps away from delicate matters. It searches for common-ground issues – such as the struggle for free-trade areas or improved demand for automobiles.

Auto parts suppliers don’t have to be a deer in the headlights on this issue.

But interests are already clashing in the discussion on carbon dioxide limits. Auto parts suppliers have the technology to make our cars more environmentally friendly. The European Association of Automotive Suppliers – where interests of automobile manufacturers and suppliers are represented separately – has spoken out against delaying carbon dioxide regulations until after 2020. In Germany, the auto industry association strongly favors a delay.

Auto parts suppliers don’t have to be a deer in the headlights on this issue. They have a right to be self-confident. Mid-sized businesses, powerless on their own, could join forces by establishing a convention – one that blacklists cost disclosures and other dirty tricks in purchasing negotiations.

Of course, both parties can act jointly in matters of mutual interest. But suppliers have to become more self-confident and establish a separate identity with their own organization that represents suppliers’ interests. After all, they create 65 percent of the value of Germany’s cars – that alone should give them the necessary confidence.

Ferdinand Dudenhöffer is director of the Center for Automotive Research at the University of Duisburg-Essen in Germany. He can be reached at: gastautor@handelsblatt.com

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