DETROIT - What's a reasonable profit margin? Where's the line between trimming fat and bone? When will we start making money? As the questions suggest, these are times that are straining the thin bonds between auto suppliers and automakers. In a market that allows little room for higher vehicle prices, carmakers are demanding that suppliers do their part to shave costs. At the same time, suppliers are being pushed to invest in product development and set up plants around the globe.
At the Automotive News' World Congress in Detroit, hundreds of suppliers and other attendees had a chance to quiz some of the biggest names in the automotive purchasing world. The questions were pointed, the answers blunt. Edited excerpts:
What are your cost-cutting goals?
Dave Nelson, Honda of America Manufacturing Inc.: We had to do some drastic cost-cutting in Japan, or we wouldn't have survived. The 1998 Accord, a bigger car with more features, will be reduced 30 percent in cost in Japan, and 20 percent in the U.S.
What puzzles me is: Why weren't these initiatives taken two or three or five years ago -especially by suppliers? These savings already could have been shared, and profitability would have improved significantly.
Harold Kutner, General Motors: Our marketing clinic for new vehicles determines the market price of a vehicle. From the market price, you determine a cost. The market is really what will determine the cost.
Don Walker, Magna International Inc.: Almost without exception, I think the cost targets are ridiculously low to start with. ... It depends on who you are dealing with.
Quite often you are dealing with a purchasing agent who just says, ``If I can suck someone into doing it for this price, they are going to do it. And the lower the price, the better.''
Some suppliers don't understand their own price structures. And they go bankrupt, or they go back to the automaker and ask for a price increase.
Tom Stallkamp, Chrysler Corp.: We told our suppliers they would get no price increases for 1996, and prices would be constantly reduced through continuous improvement.
When you first say it, that sounds really onerous. But the question is how do you offset your cost increases? ... If a supplier makes an aluminum wheel, and the cost of aluminum goes up, in the short run it's tough to offset that with some sort of cost reduction. But productivity should offset material costs.
We continually drive ``piece'' costs down by mutually sharing cost reductions with suppliers through continuous improvement.
Are the automakers switching to target pricing?
Magna's Walker: About 50 percent of our business is target priced. There is a clear trend toward target pricing. How target prices are set is going to be a major issue. There is going to be a lot of screaming and yelling. All the car companies have their own systems.
[Target pricing assesses what a consumer is willing to pay for a car, then developing it to fit that price target. Under the conventional approach, engineers had looser budgets, and marketers were forced to pass extra costs to customers.]
Which components should an automaker outsource?
Magna's Walker: I believe that 10 or 15 years down the road, an auto company should minimize the number of people in an assembly plant. An assembly plant of 3,000 people can't be managed - you don't know the people. ...
If you can set up flexible assembly lines so you can make more than one vehicle, you can get down to 800 or 1,000 people. That's what you'll see in the future.
It's not a question of union vs. non-union plants. It's just too hard to manage a plant that big. Car companies need to make components that differentiate the vehicle in the marketplace. ... The only parts car companies should make are things like head-up displays - technology that differentiates the vehicle ... or the powertrain, because it affects the feel of a vehicle. If it's a seat, an interior part or a molded part, they just want the lowest price and best quality.
This will be dictated by their labor contracts, and how quickly they can make changes - unless their own labor force can be competitive. ... I have a hard time believing they can be competitive, but some of them have two-tier wage structures, and time will tell.
Shouldn't automakers let their Tier 1 suppliers manage their own Tier 2 suppliers?
Carlos Mazzorin, Ford Motor Co.: That has been a sore point for suppliers. They say, ``If you make me responsible, give me the independence to do it. ...'' We will be giving that responsibility to the supplier.
Chrysler's Stallkamp: We are different. We believe we should cooperatively manage the supply chain. If you have three seat makers making seats, letting each decide who to buy a recliner from may not be the most economic decision.
We believe supply-chain management should be done mutually by Chrysler and its suppliers. ... We are not dictating second-, third-or fourth-tier sourcing, but we want to be aware of it, and we want to be involved. Frankly, I don't see a whole lot of first-tier suppliers who can do that yet.
How do you differentiate be-tween several rounds of negoti We have a bidding process that is strictly based on competition. If you ask a customer whether they care who supplied the horn, the seats or the steering wheels, he willtell you it's just like the buttons on his suit. He doesn't care who supplied the buttons, the horn or the wheel. You can call it whipsawing if you want, but our role is to provide the best value to the customer. ...
[Whipsawing is when an automaker pits one supplier against another in a bidding war for a contract.]
We will go through rounds of negotiations in the award of long-term contracts. And once those contracts are signed, we will honor them to the nth degree.
What is a reasonable profit margin for a supplier?
Honda's Nelson: We ask the supplier what they would like to set as their profit target. We don't dictate that. The amount of profit has little to do with the waste that can be taken out of the supply chain.
It's not at all unusual to talk about profit margins of 5 percent. It's a round figure that people like to use. The profit level is not where we get hung up on when we decide what a part should cost.
How many parts do BMW and Honda purchase in the United At the moment, we buy $500 million a year, and it is still growing. By the end of the decade, we will achieve more than $1 billion in purchases. If production grows, then our purchases will grow.
Honda's Nelson: If you measure the EPA content of our cars, the new Honda Civic has 92 percent local content, and the Accord has 90 percent. In reality, our local content is about 80 percent. We expect that to build to 90 percent over the next three years or so. We split our parts purchases 50-50 between traditional U.S. suppliers and Japanese transplants.