Analysis: Auto suppliers need strategic bonds with OEMs to navigate EV era

Automotive suppliers need to "up their game" in negotiation strategies with OEMs amid a market moving toward electric vehicles, an analysis by Plante Moran showed.

Whether suppliers are Tier 1, 2 or 3 in the automotive supply chain, vehicle manufacturers drive the business conditions in the industry, Dave Andrea, principal at Plante Moran said during a July 26 webinar hosted by the Manufacturers Association for Plastic Processors.

"Through all the simultaneous business supply chain interruptions we've had over the last two years or so, we've really seen how relationships are the most plausible way to create options out of the chaos," Andrea said. "With the right attention and investments, supplier relations can improve throughout crises.

"All the OEMs face similar challenges," he added. "Certainly to different extent depending on what their product portfolio was and how many product launches they had. But basically everybody has been dealt the same deck of cards."

Plante Moran surveyed companies to measure the quality of relationships in 2,226 buying situations within the supply chain. According to the anonymous survey, no OEMs had perfect interactions with suppliers.

The supply base ranked Toyota on top, with consistency across all its purchasing groups and the lowest percentage of poor or very poor rankings, at just 19 percent. Stellantis, at the bottom of the list, received 84 percent "poor or very poor" rankings from suppliers.

General Motors ranked in the middle and had the most consistency across purchasing groups with 41 percent "poor or very poor" rankings.

Buyer characteristics and business practices play a part in creating trust between suppliers and customers, Andrea said.

"If you have trust, it's a self-fulfilling prophecy. … The other elements then fall in place," he said. "Cost and quality improvement … should start to drive mutual profit… growing together as a customer and supplier."

One supplier who participated in the survey wrote: "The difference between price reduction and cost reduction for the staffs and meeting business plan leads to mistrust and a lack of long-term focus on what is best for the OEM and the supply base. ... It drives further consolidation as the largest suppliers can beat the get-back targets, achieve higher pricing levels and squeeze out midsize suppliers."

Andrea said, "That's the part of the industry structure that we see moving … significantly different going forward." He added that the cost to serve is lower when suppliers and customers have high-quality negotiations that lead to competitive pricing.

The last two years, amid the COVID-19 pandemic, have proven that suppliers and OEMs share mutual profit when they communicate well about risk mitigation amid logistic constraints, Andrea said. Suppliers should put resources into their best customers because collaborative relationships take investment in time, energy and capital.

"[Suppliers aren't] going to win every argument, every price increase or cost give back, but it should be mutually equitable. … If those first-tier suppliers are losing more often than not, on these individual issues with their OEM customer, you know that flows downhill," he said.

"You can choose to have a poor working relationship with one of your customers," Andrea said. "As long as you know what it is … you're not putting more investment into that poor relationship, you know they aren't putting a lot of investment in it. You might be able to live in that world and be able to be profitable ... if you're willing to put up with that agitation."

As OEMs begin taking on more EV business, suppliers will need to expand and transition with them toward further complexity in production.

"Complexity has gone down as a function of a stabilizing number of product launches within automotive," Ted Morgan, principal at Plante Moran, said during the webinar.

But that's about to change, Morgan said, as OEMs begin launching new EVs over the next few years.

That's "going to be driven down through tiers of suppliers," he said. More molds, more resins and other operational characteristics drive labor needs that are "inherently more stressful as a plastics processor running on a lean staff."

OEMs will "have to manage" their way through transitioning suppliers of powertrain components and systems to EV-focused production, Andrea said.

"This is still going to be your supply base going forward," he said. "You don't want to take their volumes down dramatically in a costly way. At the same time, you want them to ramp up on time and on budget for your new electric vehicles that you're betting the company on."

Suppliers that know the new component applications and technology requirements in EV product sets are more competitive in that space, he added.

When suppliers source to startup OEMs, they should be careful of making investments until the last minute, Andrea said, in case a deal falls through.

Startups have growth potential, but to start, the scale of volumes is negative, he said.

"Cost structures and capital structures have to be able to support that before you get to higher volumes."

In the survey, suppliers shared negative experiences related to the competencies of launch teams at startups, but also shared they "don't have the baggage of the legacy customers," Andrea said, and instead could have "fresh corporate policies and practices, that hopefully, the suppliers could shape."

"This all points to the need to place a dedicated team or at least someone targeted that knows the space on your sales team," he said.