To celebrate the 20th anniversary of Plastics News in 2009, we continue with our weekly countdown of the Top 20 stories covering issues of lasting impact. Plastics News staff members voted on the stories.
The series will end with the No. 1 story in our 20th Anniversary special edition March 16.
No. 16: Big OEMs Trim Supply Base
Original equipment manufacturers and their major suppliers seriously began to slash their supplier base in the 1990s. The aim was to reduce costs and improve operations among the surviving suppliers. If those aims were achieved, they came at great cost to molders and other processors.
The trend became most apparent in the automotive industry. Research showed the number of automotive suppliers in 1997 had already thinned to 8,000 from the 30,000 supplier count in 1988. Auto OEMs wanted even more attrition so that the remaining suppliers would get economies of scale to lower costs.
To stay on the preferred list, suppliers were forced to compete with each other on price, quality, engineering and geographic reach. Trimming the supplier base even further was a spate of mergers and acquisitions, partly fueled by stronger companies gobbling up weaker ones.
Delphi Automotive Systems Corp. was a leading proponent of supplier-base shrinkage. In 2000, an official said Delphi wanted to cut its supply base to less than half its roster of 4,500. One Delphi official said 4,500 suppliers was too big a number to handle. Delphi was buying $1 billion worth of plastic parts per year at the time.
Putting more pressure on suppliers were rebates being demanded by OEMs and Tier 1 auto parts firms. Lear Corp. and Visteon Corp. were among the leading rebate seekers. In the late 1990s, they told toolmakers to come up with 3-5 percent price rebates for molds shipped as long as a year ago. Both said they would reward compliant mold makers with future contracts.
The rebates were about equal to a mold builder's profit margin. By 2008, one Ford Motor Co. executive said the auto industry had seen half of its toolmakers shut down in the past few years. Offshore competition and shortlisting the supplier base were key to the toll.
Rebates could be an upfront payment or in the form of long-term, lower-prices contracts.
``All we're saying is we think there are big savings for all of us,'' stated Jonathan Maples, then vice president of quality and materials management for Visteon, in 2003, when Visteon was the second-largest automotive supplier in North America. At the time, the company said it aimed to reduce its supplier base from 2,500 to 500.
Delphi's rebates approach was more moderate. It wanted to share cost savings with important suppliers. Even so, it wanted suppliers to match the lowest price it could find.
By the early 2000s, the supplier base began showing severe distress after more than a decade of price competition and rebates. With their supplier bases crumbling, automakers shifted work from one supplier to another, hoping to keep ahead of the shutdowns in their backyards. This was not an environment in which processors and tool builders easily could invest in new technology.
``With the rate of change and churn [in North America] among suppliers, it's very difficult for Tier 1, even Tier 2 suppliers to make a significant capital investment,'' Stephan Braig, Engel Machinery Inc.'s president and chief executive officer of North American operations, said earlier this year.
Not surprisingly, a weakened supplier base led to major casualties. One of the first to fall was Loranger Manufacturing Corp., petitioned into bankruptcy in late 2001. During the next several years, bankruptcy casualties included Collins & Aikman Corp., Delphi Corp., Meridian Automotive Systems Inc., Dura Automotive Systems Inc., Mayco Plastics Inc., Blackhawk Automotive Plastics Inc., Progressive Moulded Products Ltd., Plastech Engineered Products Inc., Blue Water Plastics Inc. and Cadence Innovation LLC.
Given the sluggish state of the current automotive industry, more attrition seems likely.
Michael Lauzon is a long-time Plastics News correspondent based in Toronto.