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Error processing SSI fileGM to its suppliers: Let's work together
Automaker seeks to ease strained relations with parts makers while still slashing costs.
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As General Motors Corp. tries to get its North American auto business back on track, the automaker unveiled a new cost-cutting plan to its top U.S. suppliers that will push them to lower prices, improve quality and streamline operations.
The three-year initiative is also aimed at mending GM's strained relations with parts makers. The automaker struck a conciliatory tone during a nearly day-long meeting Thursday with 300 suppliers. But that goodwill will likely be tested next month when GM gives individual parts companies specific cost-cutting targets.
While the new plan stresses more collaboration, rewards top achievers and takes into account shifting market conditions, analysts said it may also give suppliers less flexibility in how they reduce costs and pressure them to open factories in low-cost countries such as China and India to meet tougher targets.
The program, which replaces a similar cost-cutting plan in place since 2002, arrives at a time of particular turmoil within the U.S. supplier industry.
Parts makers of all sizes are struggling to eke out profits in the face of rising raw material costs, declining sales by Detroit automakers and global pricing pressures.
In recent months, industry headwinds have tipped several large suppliers, including Troy-based Collins & Aikman Corp. and Novi's Tower Automotive, into bankruptcy.
"To assume that you can just put the hammer down on suppliers and tell them that they've got to come up with a lower price in this environment is just not going to fly very much any more," said Craig Hutson, a senior bond analyst with GimmeCredit in New York.
But GM is also bruised. It is battling to rebound from deep losses in North America this year, a downgrade of its credit to junk status and a dive in profitable SUV sales.
As GM moves to overhaul its business, suppliers are bound to feel some of the pain.
"The question is how can we make this better at a lower cost to both parties?" said GM spokesman Tom Hill.
The new GM plan, which begins next month and runs through 2007, replaces an outgoing program that sought to reduce the automaker's $85 billion annual purchasing bill by 20 percent over three years. GM fell short of that goal -- it won't say by how much -- and is launching the new plan to continue those efforts and that it is competitive globally.
GM has 3,200 suppliers, but the new program affects only the top 300, which account for about 80 percent of the automaker's parts purchases and typically provide multiple components. They will be evaluated based on their ability to deliver the lowest cost on individual parts, rather than their success in meeting a single company cost-reduction target, as was the practice.
Some suppliers had complained that the old program penalized the company as a whole when GM had problems with only one part. Now, GM will source the problem part elsewhere and not strike the supplier from its list.
GM says the cost-cutting targets will likely be higher for parts, such as electronics and heating and air-conditioning systems, that are getting cheaper to build but still command a high price. Targets will be lower for parts, such as vehicle frames, that are more vulnerable to spikes in material costs.
Companies that hit or exceed targets will be rewarded with new vehicle contracts at GM, in North America or in emerging markets such as China or Eastern Europe.
At Thursday's closed-door meeting at GM's proving grounds in Milford, the automaker reminded suppliers of its global presence and the opportunity that represents for them. On display were a full line of GM vehicles, including models for sale only in Europe and cars by Holden, GM's Australian unit.
Jeff Steiner, executive vice president of Southgate sunroof supplier American Specialty Cars, said many suppliers left encouraged. "I don't think it was just another demand for across-the-board cuts," he said.
But he was also cautious about what's next. "Now, it's incumbent on both GM and its suppliers to work on it because it takes two to tango."
Supplier trust in GM fell to a 15-year low in 2004, according to a survey by Birmingham-based consulting firm Planning Perspectives.
The new program signals that GM wants to improve supplier relations, said Kim Korth, president of auto consulting firm IRN Inc. in Grand Rapids. Even so, "there are still skeptics that question how it will be deployed."
GM will not send out actual cost-cutting targets to suppliers until next month. Then, suppliers will be required to respond with written plans on how they will meet the targets, GM's Hill said.
The automaker has made clear that it will seek prices for parts that are not just competitive with other North American suppliers, but competitive with the rest of the world.
Some suppliers have taken that as a threat that the automaker will source parts in low-cost countries such as China if parts makers don't come up with the right price.
"Clearly, the overseas issue is at the forefront," said Jim Gillette, a supplier analyst with CSM Worldwide in Grand Rapids. "When they say to suppliers we don't care how you get there as long as you meet the requirements, then they're going to go anywhere in the world to get it."
As consumers demand more features in their cars but expect to pay the same or lower sticker prices, many automakers have stressed the need for suppliers to become more competitive on parts pricing. And they've indicated that setting up operations in low-cost countries is part of the solution.
"That's business," Hill said. "That's competition."
You can reach Brett Clanton at (313) 222-2612 or bclanton@ detnews.com.
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