OEMs pushing the boundaries of cost reduction

Cost reduction was cited as the key factor in deteriorating supplier relations in the 2014 IHS Automotive annual Supplier Relations Study. The survey results also show OEMs are not always willing to share these desired savings in a collaborative spirit. Expanded product liability guarantees and a greater financial burden in the event of recalls are among the other concerns that are affecting suppliers' perception of their Profit Potential with the OEMs.

Several suppliers have highlighted the return to unwelcome practices, such as setting annual price reduction targets, which they deem unsustainable. While the standard annual price reduction in the industry hovers around 2-3%, it is not uncommon for OEMs to request cuts of 5% year-over-year, and in some extreme cases, as much as 10%. Suppliers seem to accept the notion that they have to find innovative ways to generate savings on a year-on-year (y/y) basis, but they find it difficult to accept that they receive little or no support from the OEMs in doing so. This lack of support often results in strained relations between the two parties, therefore resulting in lower ratings in the IHS Automotive survey.

Highlights of the 2014 study

• Nearly 75% of carmakers have received lower ratings than in 2013, with an average SuRe (Supplier Relations) index rating reduction of 2.8%. Profit potential ratings were down by 5.4% y/y on average in 2014.
• Toyota's marginal improvement in 2014 is enough to secure itthe first position in the SuRe index ranking, closely followed by BMW, which was also second in 2013. Despite occupying the top positions, both BMW's and Toyota's ratings remain significantly down compared to 2006 and 2007 highs (712 and 697 in the SuRe index scale respectively), confirming a shift in the way they handle relations with suppliers.
• Ratings for Hyundai, Kia and VW (and its controlled brands) suggest suppliers are less confident about their opportunities to win more business with these carmakers in the future, possibly linked to reduced growth prospects.
• OEMs pushing the boundaries of cost reduction with several suppliers highlighting the return to unwelcome practices, such as annual price reduction targets, which they deem unsustainable.
• Jaguar Land Rover named Most Trustworthy. Jaguar Land Rover (JLR), PSA and Chinese carmakers, Great Wall in particular, are among the winners of this year's study, all for different reasons. With a 16% improvement in 2014, JLR establishes itself as the most trustworthy OEM.
• OEMs' lukewarm response to global recalls and quality management misalignments. One supplier put it bluntly: "It's all about cost – is purchasing or engineering leading quality?".
• Overall index ratings have decreased on average by 2.6% since 2013. The SuRe index is based on automotive suppliers' ratings of 29 criteria, allocated across five categories: Profit Potential, Organization, Outlook, Trust, Pursuit of Excellence. In 2014, the Profit Potential category of the index has recorded the biggest average y/y drop in ratings (5.4%) with suppliers citing lowered profit opportunities due to OEMs' aggressive cost reduction plans and increased cost liabilities.

With few exceptions, even the best performing carmakers have become more stringent about controlling costs in 2014, signalling a general shift for the OEMs towards greater cost focus and more aggressive ways to capitalise on their negotiation leverage with suppliers. Even top scoring JLR, which offers the highest profit opportunity for suppliers based on the metrics of the study, has seen its Profit Potential rating drop by nearly 2% y/y.

Organization and Outlook categories

Other drivers that are also pushing average ratings down include a more negative assessment of long-term prospects of some OEMs, as measured by the Outlook category of the index, and less supportive vendor-facing organisations, based on responses in the Organization category. Suppliers are less confident than in the past about their opportunities to expand their business with Hyundai and VW (and its related companies), in particular. IHS forecasts suggest that compound growth for these two manufacturing groups will drop from the double-digit figures in 2009-2013 to low single digits in 2014-2018, corroborating the idea that the bonanza years for suppliers exposed to these customers could be soon drawing to an end.

Toyota returns to the top of the ranking, with a SuRe index rating of 627, thanks to a marginal improvement of relations with its supply base, largely driven by a more trustworthy organisation than in previous editions of the study and outstanding results in Europe, where suppliers indicate it is the customer most yearning to excel particularly in quality and technology. BMW ranks the same as in 2013 with the same strong performance recorded in previous years, and remains the suppliers' favourite premium carmaker to work with. Although BMW's final global rating has not changed from last year, IHS Automotive has recorded a marked improvement of SuRe ratings (632, +5% y/y) in North America, where suppliers are expecting significantly larger opportunities as the German carmaker expands its footprint in that region, while in its European production hub its ratings have dropped from 649 to 626 (-3.5%), driven by lower marks in the Organization and Long-term Outlook categories. BMW outpaces Toyota among small and medium sized suppliers (up to USD1 billion) enterprises, while Toyota is the benchmark for supplier relations in 2014 among companies with automotive sales in excess of USD1 billion.

Jaguar Land Rover named Most Trustworthy

JLR, PSA and Chinese carmakers, Great Wall in particular, are among the winners of this year's study, all for different reasons. With a 16% improvement in 2014, JLR establishes itself as the most trustworthy OEM assessed in the study this year. As an example of its efforts, JLR offers a more comprehensive protection of suppliers' intellectual property. It also is still rated among those offering the greatest profit potential to suppliers, even though it has declined slightly since last year.

OEMs' lukewarm response to global recalls and quality management misalignments

Recent recall fears do not seem to have translated into greater attention to inbound quality, as suppliers indicated that all carmakers, except Subaru and a few Chinese manufacturers, have actually become more lenient with regards to quality, in terms of PPM levels, testing, and product or process validation. Even best-in-class carmaker BMW seems to have backtracked on this point compared to last year, with lower ratings of quality demands.

According to suppliers surveyed, the cost focus is also having an impact on quality. For most volume carmakers such as VW, Fiat Chrysler, Ford, General Motors (GM) and Renault, cost pressures on the supply base are increasingly overriding quality performance that these OEMs require of their suppliers, however results vary distinctly from the different purchasing sectors.

OEMs lack consistency in their innovation sourcing strategy

OEMs' R&D budgets get stretched in several directions by the increasing complexity and variety of new automotive technologies, and as a result, tough decisions need to be made about where to invest. Suppliers have therefore expanded their role as innovators and contribute an increasing share of the innovation that goes in today's cars as they take on additional R&D activities. Accessing supplier innovation is and will be increasingly important for the OEM success in the marketplace. The 2014 study shows that some OEMs have understood this lesson better than others.

About the SuRe index

IHS Automotive developed its SuRe index based on an annual survey of the automotive supply industry which started in 2005. From its inception, the survey has included participation of more than 1,000 senior to middle managers working at automotive suppliers and directly interfacing with personnel at various OEMs. In 2014, nearly half (47%) of the 281 respondents were based in North America, 39% in Europe, 13% in Asia and 1% in South America. The 2014 study includes the views of representatives of 51 of the world's top 100 automotive suppliers.

A variety of suppliers' organisational functionds are surveyed in order to include the different perspectives on the business relations and practices of OEMs. Respondents are active in marketing and sales, engineering, programme management, research and development, quality and manufacturing. The 29 questions are organised under five categories: Profit Potential, Organisation, Trust, Pursuit of Excellence and Outlook. The questions cover the different phases of interaction, from request for quotation through development to warranty liability management. These result in a numeric value ranging from 0 to 1,000. A SuRe index higher than 650 is considered a satisfactory result, while anything below 450 indicates the state of relations is poor. For further information or enquiries, please contact matteo.fini@ihs.com.

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