Delphi Automotive Systems Corp., Meritor Automotive Systems Corp. and other large automotive-parts makers plan to cut their supply base by 50 percent or more in the next few years. Suppliers that can't compete on price, quality, engineering or geographic reach will be slashed. The cuts will put pressure on thousands of large Tier 2 suppliers — plus smaller, often family-owned, parts makers, ranging from plastics companies to screw makers to small metal processors. The likely impact will be more mergers and acquisitions among that group, as the surviving suppliers buy up competitors that have lost — or are in danger of losing — key contracts.
At stake are billions of dollars in worldwide purchasing. Troy-based Delphi spends $13.5 billion annually in parts and raw materials and has begun a rationalization of its supply base, designed to cut more than 2,000 of 4,500 North American suppliers.
"That's just too many suppliers to manage," said Ray Campbell, Delphi vice president of global purchasing. "We've asked our purchasing teams to reduce our supply base by 50 percent. We don't want to break contracts, and we want to minimize the trauma, but you can't manage that many suppliers and improve quality."
Delphi, the world's largest auto supplier, with 1999 sales of $29.2 billion, began notifying suppliers of its plans late last year, Campbell said. Managers have begun reporting back to Campbell with proposals on where, when and whom to cut.
Campbell said some of Delphi's largest purchasing areas are nonferrous metals, where it spends $1 billion to $2 billion; castings, $1 billion; plastic parts, $1 billion; and stampings. He said fastener purchasing is an area rich with opportunity to cut suppliers.
"It won't be a big bang, but there are certainly some suppliers that have earned our disrespect and will lose our business. Some suppliers will gain while others don't see the opportunity in this. They are the ones that are probably going to be in trouble," Campbell said.
The trimming of Tier 2 suppliers is reminiscent of what GM and Ford Motor Co. began about 10 years ago.
In the late 1980s and early 1990s, the automakers made major cuts in their supply base, saying such maneuvers saved time and money. The cuts resulted in the number of suppliers worldwide dropping from 30,000 to 8,000 and spurred acquisition-hungry companies like Lear Corp. and Federal-Mogul Corp.
"What these big Tier 1 suppliers are talking about will put a real squeeze on the Tier 2 companies," said Clifton Roesler, managing director of W.Y. Campbell & Co., a Detroit investment-banking firm.
"Now they will have to bulk up and consolidate. I think it means the focus for the next few years will be on which small, Tier 2 supplier has bought which rival.
"What you'll see is `bigger is better,'|" said Van Conway, president of Conway, MacKenzie & Dunleavy, a Birmingham management and turnaround firm.
"Large suppliers don't want to depend on some small company with $40 million in sales. I'd say all of the companies with sales of $20 million to about $1 billion are at risk. Some billion-dollar supplier doesn't want his whole chain interrupted because some $20 million company is struggling," Conway said.
Another supplier that has begun a massive reduction of its suppliers is Troy, Mich.-based Meritor, a supplier of axles, brakes, transmissions and wheels. Meritor had 1999 sales of $4.5 billion.
Meritor has about 2,000 direct suppliers and wants to cut that down to 600-800 over three to five years, said Carl Soderstrom, senior vice president of engineering, quality and procurement.
He said the company sent a letter to its suppliers late last fall saying the company was "making cuts and looking for suppliers than can support us." Meritor had been cutting its supply base by about 10 percent each year, but acquisitions brought new suppliers.
"We've never gotten it down to where we want, so we are raising the bar on cuts and getting a lot more aggressive," he said. "We are looking at suppliers commodity by commodity."
He cited Meritor's plastics purchasing as an area to trim. He said Meritor spends $94 million a year with 125 plastics suppliers. He'd like that number closer to 25.
Once the large Tier 1 suppliers make the cuts, they'd like to negotiate longer contracts with the remaining suppliers.