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GM puts squeeze on suppliers

Automaker wants parts makers to open plants in low-cost countries, a move sure to spark fury.

By Brett Clanton / The Detroit News

DETROIT -- General Motors Corp. is launching a three-year cost-cutting plan that will stress the need for U.S. parts suppliers to open more factories in low-cost countries and to become more competitive on costs and price.

The new plan, designed to save GM billions of dollars over time, could increase already simmering tensions between the struggling automaker and its supplier network.

Bo Andersson, GM's purchasing chief, is expected to roll out the plan to 250 top suppliers at a Sept. 22 meeting at the automaker's proving grounds in Milford.

GM is wrapping up a separate three-year program aimed at reducing by 20 percent its $85 billion global purchasing bill as rancor among suppliers over the automaker's cost-cutting demands is reaching a fever pitch.

In an interview with Automotive News last month, Andersson said suppliers have shouted at him and even grabbed his tie to vent their frustrations. "I see much more emotion in our supply base and nonprofessional businessmanship in the last two years than I've seen in my whole career," he said.

While it's nothing new for a Detroit automaker to push suppliers to reduce costs, GM is under particular pressure to find additional savings after losing $2.5 billion in North America this year. GM also is pressing the United Auto Workers to consider higher out-of-pocket health care costs.

The new cost-cutting plan for suppliers is likely to widen the rift between GM and its U.S. auto parts makers, who in a recent survey said their trust in GM had fallen to a 15-year low. Parts makers are struggling to eke out profits because of high raw material costs, weakening sales by Detroit automakers and global pricing pressures. Several large players have been forced into bankruptcy.

In such an environment, GM needs to be careful how hard it pushes, said Jim Gillette, an industry analyst with CSM Worldwide in Grand Rapids.

"There are a lot of fragile suppliers out there," Gillette said.

'Aggressive restructuring'

But GM is making clear that those who cannot keep up will be left behind.

In a presentation late last month to financial analysts, Andersson called for an "aggressive restructuring" of the company's supply base to include only the suppliers who are on board with GM's delivery, quality and cost targets.

In addition, he said GM's North American suppliers needed to accelerate efforts to locate factories in low-cost countries such as China, Brazil, Honduras and India to become more competitive.

As GM expands its global "footprint" into regions outside the United States -- particularly in emerging markets such as Eastern Europe, China and Korea -- it says it wants suppliers to be there to grow with the company and to ease logistics. But GM also is interested in lower prices for parts, a natural byproduct of sourcing components in regions where labor is cheaper -- a sore point for many U.S. suppliers.

"When they start talking about restructuring, it strikes me that it's just a veiled threat that if you don't come through (with lower prices), we're going to get other suppliers," said John Henke, head of Planning Perspectives Inc., an industry consulting firm in Birmingham that conducts an annual survey of supplier attitudes toward major automakers.

GM will not discuss details of the cost-cutting program, but Andersson gave hints about the plan in a June meeting with suppliers.

In addition to addressing the need to locate overseas, the program will begin holding more suppliers accountable for reducing costs. It will also give credit against current cost-cutting targets to suppliers that find ways to take costs out of future vehicle programs, according to a slide presentation made at a June meeting.

GM's plans will overlap

The new program is scheduled to begin in the fourth quarter and run through 2007.

It will briefly overlap and then replace a previous program ending Dec. 31 that GM called "20/3." Under that plan, GM sought a 20 percent reduction in parts purchasing costs during the last three years.

While the 20/3 program brought a "great deal of savings" to GM, it fell short of the 20 percent goal, said Thomas Hill, a GM spokesman, who declined to elaborate. He said that 20 percent was a "stretch goal" the company knew would be hard to achieve and that the new program would be a "continuation" of cost-reduction efforts.

Richard Dauch, chairman and CEO of American Axle & Manufacturing Inc., a publicly traded axle maker in Detroit and a supplier to GM, said he was not aware of the details in the automaker's new plan but would be "open-minded" about the issues the automaker is facing.

"We have to adjust to global competition," Dauch said Thursday after a Detroit Economic Club luncheon. "Each customer has to put together an action plan of how can they compete with great products and with the economic reality. We're all going to have to be part of that. Nobody can wait this war out."

During the previous program, GM was successful in reducing the size of its supply base -- from 3,700 in 2003 to about 3,200 today -- as part of an effort to create a more efficient supply chain. And that figure will probably decline more under the new plan, Hill said.

"As we become more strict about our alignment issues, some suppliers may decide to put their hands up and say, 'We're going to elect not to do anymore business with you.'"

And what about suppliers who decide not to build factories in low-cost countries? Will GM sever ties with them?

"It's not a mandate," Hill said. "If you can make it work where you have operations, whether that's in North America or Western Europe or South America, that's not an issue. The issue is, if you have a target, you may want to look at low-cost-countries as an option."

Overseas factories a must?

Some parts makers have complained that GM has made it all but impossible not to open factories overseas if they want to continue doing business with the automaker.

"Some suppliers have tried to tell GM that not everybody needs to be global, not all the parts need to be global," CSM's Gillette said. "But they just figure that's the way they're going to get the cheaper price."

DaimlerChrysler AG's Chrysler Group recently announced a new supplier strategy that more closely mimics the often-praised relationship Japanese automakers have with suppliers. Chrysler has pledged to reward top-performing suppliers with additional contracts with the goal of forming long-term relationships with parts makers rather than sourcing anew with each vehicle.

But Chrysler also wants suppliers to consider opening factories in regions outside of North America.

"As a supplier, an ability to operate in multiple geographic locations simultaneously is a competitive edge," Tom LaSorda, the incoming CEO of Chrysler, said in an Aug. 29 speech in Detroit.

Toyota seeks cost cuts

In recent years, Toyota Motor Corp. has also demanded as much as a 30 percent reduction in component parts from its suppliers. And last month, Nissan Motor Co. said it is aiming to reduce component costs by 15 percent over the next three years by buying more parts from China and other low-wage countries.

North American auto suppliers will close plants and move as much as 20 percent of their production to lower-cost regions by 2010, according to a survey conducted last year by Roland Berger Strategy Consultants in Troy.

But parts makers are more likely to respond to cost-reduction efforts if automakers work together with suppliers rather than dictating demands to them, said David Andrea, vice president of the Original Equipment Suppliers Association in Troy, a supplier industry trade group.

"The proper way of looking at supplier relationships is where both sides attack the costs."

GM is also expecting suppliers to play a role in reducing its warranty costs, which have dropped from $35.56 per vehicle after six months in service to $24.90 in 2004. GM's target for 2005 is $22.05 per vehicle. The automaker also is stressing more early collaboration between its engineers and suppliers to avoid late changes in the design of parts, which can produce quality problems.

But GM's Andersson said the automaker will not do business with suppliers who are in bankruptcy. Among the list of suppliers in Chapter 11 bankruptcy protection are interiors specialist Collins and Aikman Corp. in Troy and vehicle frame maker Tower Automotive in Novi.

Delphi Corp., the world's largest supplier, which was spun off from GM in 1999, has threatened a bankruptcy filing by Oct. 17 if it cannot get the UAW to agree to lower labor costs. But GM declined to say how the company would respond if Delphi filed.

1,073 Posts
My response to this is simply....

I work for a nationwide healthcare benefits broker that handle large companies, such as GM. It is UNACCEPTABLE to ME that using healthcare costs as an excuse is BS. I do agree that healthcare costs are on the rise, however, there are several avenues that GM may and may not have approached. For instance, HSA plans, which is a medical plan attached to a savings/investment accounts. It's up and coming and creating stronger consumer awareness. It's a mega benefit that you will hear more and more about. Either way, I highly recommend any and all of you who work or are affiliated with GM, notify your HR department, or supervisors to make sure that they have exhausted all of their efforts when discussing healthcare benefits. And outsourcing out of the country is unacceptable while representing the USA label. I'm truly disappointed. Truly.

Moderator Emeritus
2,238 Posts
Hmmm.... Sending jobs overseas isn't anything new. Now the IT world is dealing with it too. Call for technical support on your Desktop computer and find you are getting support from India or somewhere like that.

In the short term it's great for the company outsourcing to India. $10 a day (or what ever they are paid) verses $40k a year or more. And those people don't cause problems. They need the work and they know there are lots of people in line behind them for their jobs.

The problem is that those people arn't buying the product. They arn't going to purchase a Sky or a computer or almost anything else they are manufacturing for us.

If the jobs go overseas so do the purchasing dollars. We have to also remember that if you buy a foreign car perhaps you should get a foreign job! I really don't care who gets my money (GM Ford Toyota) As long as the jobs are here in North America! Build it where you sell it.

If GM wants to increase profits they need to produce better designs that appeal to the market. The Solstice/Sky is a good example. Demand is high! The product looks good. People want this product.


6 Posts
Out sorceing

I may not like the idea of sending jobs outside the US but bussiness is bussiness. No mater what we do for a living we want to make the most we can and the best way is to cut the cost and keep the price. Or raise the price and drop the quality. We have in many cases out priced our selfs in many fields not just the Auto industry. So what we realy need is to find a cheaper way of building without cuting quality. That is were we here in this country have always been our best finding a way when eveyone says there is not a way. So lets quit complaining and start looking and thinking. There has to be a way.
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