Auto maker ratings fall amid changes

Supplier relations have taken a hit, at least according to the most recent study by Planning Perspectives Inc.

The firm just completed its 16th annual North American Automotive OEM Supplier Working Relations Index Study, evaluating Ford, General Motors, Fiat-Chrysler U.S., Nissan, Toyota and Honda on the working relationship with their suppliers.

None of the six original equipment manufacturers received a “good” rating, which is a score of 350 or more. Toyota led the way at 332, and Honda was not far behind at 323, both down compared to their 2015 scores.

Ford and GM improved their scores compared to 2015. Ford was up six points to 267 and GM made the biggest leap to 250, which was the cutoff for adequate, up from 224 in 2015.

Nissan and FCA both received “poor” ratings of 225 and 222, a step back from 2015.

“Everyone is under such pressure right now,” said David Andrea, executive vice president of research at the Center for Automotive Research. “I don't know if you can pinpoint any one reason for any particular company, but across the board some of the things I would look at are a number of major organizational changes going on in the purchasing groups. More even if you look at the supplier side.”

Andrea added that both Ford and GM have made improvements, and it is apparent in their 2015 scores. Toyota and Honda traditionally score well in this survey thanks largely to their global architectures, which Andrea said helps simplify the relationship with the supply base because their cars are made in basically the same way with virtually the same parts all over the world.

But as Toyota and Honda have expanded their platforms, their performance in surveys like these has weakened, he said. Both OEMs last received a “good” rating in 2008—Toyota at 367 and Honda at 359. The pair has been the top two in every survey since 2002.

“They're moving toward that same mod-el,” he said. “If you look at the complexity of the product portfolio, the Detroit 3 with very diverse product portfolios from small subcompacts to large utilities, it's harder to maintain a relationship trying to quick-ly relaunch all of those different models. As the Japanese companies put more product into their portfolio, more complex-ity, you've started to see their numbers come down a bit because their product complexity has gone up.”

The automotive industry is facing a number of key issues that puts pressure on both OEMs and suppliers. One of the biggest is the Corporate Average Fuel Economy standard. U.S. regulators want to increase fuel economy to 54.5 miles per gallon by 2025, but with the current level at about 24.5, that would require more than doubling that number.

“The industry is really looking at the feasibility of these standards from 2021 through 2025,” Andrea said. “The thing that is the biggest hurdle right now is aligning the market forces with the fuel regulations, and there the biggest market force is fuel price scenarios, and the second is the way the standards have been developed and are on the books in terms of what then is classified and measured as a passenger car versus a light truck.”

There are concerns that improvements to engines won't be enough to reach this lofty goal in nine years. More hybrids will be needed, and with gas prices tumbling compared to 2008, the market is not embracing these alternatives like regulators initially thought.

“There are a variety of things,” Andrea said. “One is looking at the way public policy can incentivize the vehicle sales as well, looking at what might be able to be done on tax credits for hybrid sales as we have and/or electric vehicle purchases to lower the purchase price of these vehicles. The other is looking at types of credits, or continuation of credits that are in place that may be expiring, like the flex fuel credit.”

A record number of recalls and warranty campaigns also have contributed to putting a strain on supplier/OEM relationships. During that span, the industry has been hit with three of the largest recall campaigns—GM's ignition switch, Takata's air bags and Toyota's sudden acceleration problem, though the latter was not a formal recall.

Andrea said these recalls mean suppliers are trying to keep up with service parts in addition to the OE business. It demands that the top teams deliver a response on a recall at the same time they're trying to launch a new product.

But the OEMs are trying to adapt. Andrea said, in Toyota's case, one of its responses was to localize and create more autonomous decision making in the firm's regions so it would be more responsive if issues like this arose again. GM and FCA have actual product compliance offices now, which Andrea said are to act as a bridge between engineering, purchasing and manufacturing.

Andrea said looking at the traceability of components is a big focus for the industry. Parts are sourced all over the world, some-times being brought into sub-assemblies and shipped upwards of two to four times.

“I think the industry is doing better fact-checking there,” Andrea said. “Those are major investments that are being made by the vehicle manufacturers and the first-tier suppliers.”

CAR Group doesn't do a production forecast, but it does a sales forecast. Like most others in the industry, CAR Group projects growth for 2016 then leveling off in 2017 and 2018 before a projected year-over-year decrease in the U.S. for 2019.

Andrea said the supply base is guarded in its approach to adding more production, choosing to utilize the capacity it has more efficiently through capital equipment investments to get more output per shift rather than stretching too far.

“The supply base still doesn't want to get out in front of the demand curve with production that will ultimately be stranded or underutilized,” he said. “It is being very, very cautious along these lines. The vehicle manufacturers that can provide longer and more stable visibility into their production schedules are going to end up with better customer/supplier relationships because it allows the suppliers to better manage this increased throughput.”

Even with the projected dip beyond 2018, Andrea said there's nothing that's more than a 10 percent unit correction. That means that even if there is a drop in vehicle production, it's likely not going to be dramatic.

But while North America is doing fine with regards to vehicle production, the same cannot be said in China and Europe.

“We have to take that in a global context,” Andrea said. “Certainly those big, big suppliers' revenue base is spread across the globe. Even if North America is doing well in terms of unit production, there still will be pressure on U.S. operations to perform.”

Europe is rebounding, but that rebound is slow and methodical. He said it's probably going to take about 10 more years for it to recover to levels it reached prior to the recession.

China has a different problem. Andrea said suppliers have to adjust to slower than projected growth. Solid 5-6 percent growth still is forecast for the area, but vehicle manufacturers are under tremendous pri-c-ing pressure to realize that growth, and that in turn places pressure on the supply chain.

“For a supply chain that may have had a business plan that was built around 10 or 12 percent growth, now you have to revise that business plan to be successful with maybe half of that growth,” Andrea said.

Brazil and the South American market, which he said is at depression levels, remain a large concern, especially for large suppliers.

“There is great uncertainty as to when the vehicle market will rebound,” he said. “Granted it's a smaller market in context of the global markets, but again there's pressure to try to make up for losses in Brazil. There's now more attention given to North America, which is generally generating positive returns on capital.”

Automotive News, sister publication to Rubber & Plastics News, contributed to this report.