Tom Stallkamp, Chrysler Corp.'s executive vice president of procurement and supply, stirred suppliers in October when he told the SAE Greenbrier conference that ``merger mania'' in the auto supply industry may have gone too far. Later in the month he raised the issue again in Detroit, at a conference sponsored by Automotive Industries magazine. Edited excerpts from that address follow:
I didn't mean to say that all mergers are necessarily bad. In fact, some of the recent ones may actually be quite beneficial. But I also happen to believe that there may be a better way to create value throughout the supply chain.
So let me spend a few minutes comparing today's ``mega-merger'' activities on the supply side with Chrysler's concept of supply chain management on the [original equipment manufacturer] side.
It has been estimated that, among today's 1,500 or so Tier 1 automotive suppliers around the world, only 400 will still be around by the turn of the century. And, if that's true, the next three years will see today's already-hot takeover activity heat up a lot more.
That's great for the consultants and the investment bankers - but I'm not sure it's the right thing for those companies, or for our industry, or for the American economy.
I know many of you suppliers are convinced that it's essential to merge with your competitors if you're going to hold on to one of the increasingly rare Tier 1 supplier slots sanctioned by the OEMs - or at least that's the common belief. And I also know that the rumor mill is rife with suggestions that OEMs are telling you that you absolutely must buy your competition.
But that's simply not the case at Chrysler. Of course, you'll have to speak individually with our other competitors to learn where they stand.
But - at least as we see it at Chrysler - getting swept away in part of today's merger-mania could easily work to your detriment rather than your advantage. In fact, I think it could be argued that suppliers could face at least three major pitfalls if you rush to buy up your competition:
First, you could, very simply, buy the wrong company - and find yourself stuck with plants, product lines and a lot of extra baggage that isn't in synch with your goals and operations, and never will be.
Second, you could buy a company for its expertise in some specialized technology you don't have at the moment - but then the technology used by the OEMs could change, leaving you stuck with what suddenly has become a very out-of-date investment.
And, third, you could buy a company that's simply too large for your company to digest - and find yourself saddled with huge amounts of debt and fewer options for additional growth or product development.
Of course, there's also the possibility you could get very lucky and find a partnership that works well for everyone involved.
But in today's mad scramble to find partners, I believe only a fortunate few will be able to find exactly the right partner, achieve some sort of ``magic cultural change'' within their combined companies, and live together happily ever after.
The history of our industry is cluttered with sad tales of seemingly promising mergers that
didn't pay off. On the other hand, it also contains quite a few success stories - including such modern-day examples as Chrys-ler and American Motors and, most recently, BMW and Rover.
So, despite my strong feelings against many mergers, I don't want to suggest that mergers per se are universally evil. But I do think that - as in the case of any proposed long-term relationship -it's important to look before you leap.
And so I'd like to offer suppliers a list of possible alternative uses for whatever substantial amount of capital your company might have earmarked for acquisitions:
Idea No. 1: Invest in your core strengths - to become even better at what you do best.
Idea No. 2: Improve your [research and development] capabilities to become the leader in new product research without having to buy someone else's research.
Idea No. 3: Invest in a state-of-the-art [computer-aided design and manufacturing] program to improve creativity and communication among your employees, such as we've done at Chrysler with our CATIA system - and make your customers part of the network, too.
Idea No. 4: Convert your sales staff into genuine ``program managers'' - and bring more productivity to your company as you bring more value to your customers.
Idea No. 5: Consider being more frugal and less frivolous with your capital, and look for other ways to use it to help increase your returns.
I believe there can be better ways to reduce costs and increase value. ... Better communication creates better understanding, and we believe that better understanding can lead to lower costs and better products throughout the supply chain.
You don't have to own the system to have system integration. But you do need to manage the system to reduce costs. And that means understanding it, streamlining it, and continually looking for ways to improve it.