DETROIT (June 6, 1:15 p.m. EDT) — When DaimlerChrysler AG, Ford Motor Co. and General Motors Corp. announced their joint online trade exchange in February, many suppliers feared it would be a high-tech tool for squeezing margins.
More than three months later, many unanswered questions surround the online exchange, now known as Covisint. But a new study suggests that automakers and suppliers stand to win by using it and other electronic marketplaces.
The technology will provide suppliers with marginal annual pretax improvements in profit over the next five years, according to the study, called "B2B E-commerce in the Automotive Industry — A Virtual Reality Check."
Roland Berger Strategy Consultants and Deutsche Bank Alex. Brown conducted the study earlier this year. It was based on telephone and in-person interviews with 150 automaker, supplier and dealer executives around the world.
The study finds that consumers could be big winners, too. Much of the savings that suppliers and automakers achieve through business-to-business activities could be passed on to consumers in the form of lower prices for new vehicles.
But even after creating savings for their automaker customers, Tier 1 suppliers will see an annual 1.8 percent pretax profit improvement, according to the study. Tier 2 suppliers will have a 4.6 percent pretax profit improvement, the largest percentage improvement of the four tiers of the supply chain measured.
"There's going to be implications for profitability," said Rod Lache, vice president of Deutsche Bank Securities Inc. in New York. "It's going to be positive — and, importantly, it's going to be positive both for the automakers and the suppliers, which is I think a very different finding than what many people have been talking about."
The online trade exchange was announced Feb. 25. DaimlerChrysler, Ford and GM have equal equity in the exchange and are developing a business plan. Renault SA and Nissan Motor Co. have agreed to join as equity partners. Toyota Motor Corp. also will participate in the exchange, but it is not clear if Toyota will be an equity partner.
Suppliers initially let out a collective sigh of relief. Many feared DaimlerChrysler, Ford and GM would create separate electronic marketplaces, forcing suppliers to work with three separate exchanges. But once Covisint is in operation, possibly late this year, DaimlerChrysler, Ford and GM will use it as their primary tool for purchasing.
But many suppliers still feel uneasy about Covisint. Their main fear is that automakers will use it to exact deeper price cuts through its purchasing and auction capabilities.
The savings that can be achieved from the exchange will be culled from more than just purchasing, according to the study.
Covisint and other business-to-business initiatives could shave nearly $1,200 from the cost of building a vehicle in North America, according to the study. But only 33 percent of that savings will come from purchasing of parts, commodities and raw materials. More than 16 percent of cost savings is expected from product development and another 10 percent from inventory reduction.
"The savings in North America are pretty nicely balanced across all different functions and processes of the auto industry," said Michael Heidingsfelder, a Roland Berger partner in the consulting firm's Troy, Mich., office. "Product development is a major area for savings, but will take a longer time than other areas."
To realize any cost savings, suppliers first must get a handle on their costs before bidding in an online auction on Covisint, said Mark Lee, a senior associate at Conway MacKenzie & Dunleavy, a financial and management consulting firm in Birmingham, Mich.
"Some of our clients don't know their costs very well," Lee said. That can be dangerous with online auctions, he said.
"An online auction can create a frenzy around getting a piece of business," Lee said. "Some suppliers are undercutting their profitability. They must understand their thresholds."
Until Covisint is operational, Ford and GM will continue to use their own online exchanges for purchasing and auctions.
Lee recommends that companies first identify all their costs — and not just the direct cost of materials. Companies must know their variable or indirect costs, such as for material handling and quality initiatives, he said. Also, identify fixed overhead costs and selling, general and administrative costs, Lee said.
There have been instances where suppliers have bid on business online and later discovered that they are going to lose money on the deal, Lee said. In those instances, the suppliers have had to negotiate with the automaker, he said.
"The (original equipment manufacturer) has in some cases given the supplier additional work in other areas," Lee said. "I'm now working with OEMs so they can understand this phenomenon."
Smaller suppliers often do not have the right tools to analyze their costs, Lee said.
Covisint will drive efficiencies into the supply chain, Lee predicted.
"It will drive suppliers to focus on what they do best — their core business, rather than take on noncore business," he said.
