Share the risk, share the wealth. That´s the idea behind Textron Automotive Co.´s new plan to split engineering and development costs with its subsuppliers.
Textron´s plan deserves a careful look by all the plastics processors, toolmakers, designers and others that work with the Troy, Mich., auto supplier. At first blush, it looks a lot better than the rebate programs that other Tier 1 firms have tried recently.
The rebates have been little more than blackmail. Tier 1 companies told subsuppliers that if they wanted to keep their current work and bid on new jobs, they would need to refund a percentage of their revenues from the past few years. That concept is ridiculous.
How is Textron´s plan different? After all, doesn´t it also demand cash now in return for the promise of future business?
Well, yes. But one feature that looks promising is the idea that suppliers would be reimbursed for the upfront expenses should the contract prove profitable. There´s even the possibility of earning a premium if the contract hits specified sales quotas.
That sounds almost like a genuine partnership — a word we usually avoid using, since it´s been misused by original equipment manufacturers so much in recent years that the popular definition is analogous to serfdom.
One of the biggest risks of Textron´s plan is the timing. Half of Detroit seems to think the auto industry is poised for a slump. All but the most optimistic soothsayers don´t expect car sales to maintain their record pace. If car sales tank, subsuppliers can forget about winning back upfront engineering and development expenses.
Yes, there´s a bit of a Las Vegas feel to this plan. But that´s a necessity today, because the automakers have pushed so much of the work, and the risk, onto the shoulders of the global mega-Tier 1 companies.
If Textron´s idea catches on, it could make suppliers a lot more careful about picking up business on some automotive projects. Think about it. On which contract would you have a better chance of earning back your initial investment: the next full-size Ford truck, or General Motors´ latest attempt at a minivan?